PAGE 1
Prospectus for the T. Rowe Price Capital Opportunity Fund, Inc.,
dated November 29, 1994, should be inserted here.
To Open an Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields & Prices
Tele*Access(registered trademark)
1-800-638-2587
1-410-625-7676
24 hours, 7 days
Investor Centers
101 East Lombard St.
Baltimore, MD
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD
Farragut Square
900 17th Street, N.W.
Washington, D.C.
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA
Invest With Confidence
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
PROSPECTUS
CAPITAL OPPORTUNITY FUND
T. ROWE PRICE
CAPITAL OPPORTUNITY FUND, INC.
NOVEMBER 29, 1994
AN AGGRESSIVELY MANAGED STOCK FUND FOR INVESTORS SEEKING SUPERIOR CAPITAL
APPRECIATION THROUGH A FLEXIBLE INVESTMENT STRATEGY.
Facts at a Glance
Investment Goal
To provide superior capital appreciation by investing primarily in the common
stocks of small, medium and large companies. As with any mutual fund, there is
no guarantee the fund will achieve its goal.
Strategy
To establish a concentrated portfolio consisting of a relatively limited
number of stocks, primarily of U.S. companies believed to offer the best
opportunities for capital appreciation. The Fund will use a flexible approach
to stock selection, not limited by investment style, industry or a company's
size.
Risk/Reward Potential
Higher risk of loss is assumed in pursuit of superior capital appreciation.
Concentrated assets in a limited number of companies involves greater risk
than investing in a more broadly diversified portfolio, but holds the
potential for greater rewards.
Investor Profile
Individuals seeking significant capital appreciation, who can accept the
higher risks of an aggressively managed portfolio of stocks. Appropriate for
both regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no-load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates were managing over $54 billion for
approximately three million individual and institutional investor accounts as
of June 30, 1994.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
T. ROWE PRICE
CAPITAL OPPORTUNITY FUND, INC.
NOVEMBER 29, 1994
PROSPECTUS
CONTENTS
_____________________________________________________________________________
1
_____________________________________________________________________________
ABOUT THE FUND
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TRANSACTION AND FUND EXPENSES 2
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FUND, MARKET, AND RISK
CHARACTERISTICS 3
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2
_____________________________________________________________________________
ABOUT YOUR ACCOUNT
_____________________________________________________________________________
PRICING SHARES; RECEIVING
SALE PROCEEDS 6
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DISTRIBUTIONS AND TAXES 6
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TRANSACTION PROCEDURES AND
SPECIAL REQUIREMENTS 8
_____________________________________________________________________________
3
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MORE ABOUT THE FUND
_____________________________________________________________________________
ORGANIZATION AND MANAGEMENT 10
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UNDERSTANDING FUND PERFORMANCE 11
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INVESTMENT POLICIES AND PRACTICES 12
_____________________________________________________________________________
4
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INVESTING WITH T. ROWE PRICE
_____________________________________________________________________________
MEETING REQUIREMENTS FOR
NEW ACCOUNTS 17
_____________________________________________________________________________
OPENING A NEW ACCOUNT 17
_____________________________________________________________________________
PURCHASING ADDITIONAL SHARES 18
_____________________________________________________________________________
EXCHANGING AND REDEEMING 19
_____________________________________________________________________________
SHAREHOLDER SERVICES 19
_____________________________________________________________________________
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE INVESTING. PLEASE
KEEP IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION ABOUT THE
FUND, DATED MAY 1, 1994 AMENDED TO SEPTEMBER 29, 1994, AND NOVEMBER 29, 1994,
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED
BY REFERENCE IN THIS PROSPECTUS. TO OBTAIN A FREE COPY, CALL 1-800-638-5660.
1 ABOUT THE FUND
Transaction and Fund Expenses
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
_____________________________________________________________________________
LIKE ALL T. ROWE PRICE FUNDS, THE FUND IS 100% NO LOAD.
In Table 1 below, "Shareholder Transaction Expenses" shows that you pay no
sales charges. All the money you invest in the fund goes to work for you,
subject to the fees explained below. "Annual Fund Expenses," provides an
estimate of how much it will cost to operate the fund for a year, based on
projected 1995 fiscal year expenses (and any applicable expense limitations).
These are costs you pay indirectly, because they are deducted from the fund's
total assets before the daily share price is calculated and before dividends
and other distributions are made. In other words, you will not see these
expenses on your account statement.
_____________________________________________________________________________
For the fiscal period ended December 31, 1994, the fund is expected to pay
$7,700 to T. Rowe Price Services, Inc. for transfer and dividend disbursing
functions and shareholder services; $0 to T. Rowe Price Retirement Plan
Services, Inc. for certain recordkeeping services for retirement plans; and
$5,000 to T. Rowe Price for fund accounting services.
_____________________________________________________________________________
Shareholder Transaction Annual Fund Percentage of Fiscal
Expenses Expenses 1995 Average Net Assets
_____________________________________________________________________________
Sales charge "load" None Management fee 0.39%
on purchases (after reduction)
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Sales charge "load" None Marketing fees None
on reinvested dividends (12b-1)
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Redemption fees None Total other 0.96%
(Shareholder
servicing, custodial,
auditing, etc.)
_____________________________________________________________________________
Exchange fees None
_____________________________________________________________________________
Total fund expenses
(after reduction) 1.35%*
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Note: The fund charges a $5 fee for wire redemptions under $5,000, subject to
change without notice.
*To limit the fund's expenses during its initial period of operations, T. Rowe
Price has agreed to waive its fees and bear any expenses through December 31,
1996, to the extent such fees or expenses would cause the fund's ratio
of expenses to average net assets to exceed 1.35%. Fees waived or expenses
paid or assumed under this agreement are subject to reimbursement to T. Rowe
Price by the fund whenever the fund's expense ratio is below the previously
stated ratio; however, no reimbursement will be made after December 31, 1998,
or if it would result in the expense ratio exceeding the ratio as previously
stated. Without this expense limitation, it is estimated that the fund's
management fee and total expense ratio for the first full year of operation
would be 1.76%. Organizational expenses will be charged to the fund over a
period not to exceed 60 months.
_____________________________________________________________________________
Table 1
The main types of expenses, which all mutual funds may charge against fund
assets, are:
o A management fee: the percent of fund assets paid to the fund's
investment manager. The fund's fee is comprised of a group fee, discussed
later, and an individual fund fee of 0.45%.
o "Other" administrative expenses: primarily the servicing of shareholder
accounts, such as providing statements, reports, disbursing dividends, as
well as custodial services.
o Marketing or distribution fees: an annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see "The Fund's Organization
and Management."
o Hypothetical example: Assume you invest $1,000, the fund returns 5%
annually, expense ratios remain as previously listed, and you close your
account at the end of the time periods shown. Your expenses would be:
_____________________________________________________________________________
THE TABLE AT RIGHT IS JUST AN EXAMPLE; ACTUAL EXPENSES CAN BE HIGHER OR LOWER
THAN THOSE SHOWN.
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1 year 3 years
_____________________________________________________________________________
$14 $43
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Table 2
Fund, Market, and Risk Characteristics: What to Expect
To help you decide whether the fund is appropriate for you, this section takes
a closer look at its investment objective and approach.
_____________________________________________________________________________
THE FUND SHOULD NOT BE RELIED UPON AS A COMPLETE INVESTMENT PROGRAM NOR BE
USED FOR SHORT-TERM TRADING PURPOSES.
What is the fund's objective?
The investment objective is to provide superior capital appreciation over time
by investing primarily in U.S. common stocks of small, medium, and large
companies. Income is not an objective and, therefore, is not a prerequisite in
the selection of securities.
What is the fund's overall investment program?
The fund's primary focus will be on the common stocks of U.S. companies
appearing to offer the best opportunities for capital appreciation at any
given time, based on the proprietary research of T. Rowe Price. The fund
manager will pursue a flexible investment strategy in the selection of stocks,
not limited by any particular investment style, industry, or company size.
Therefore, this fund has much broader latitude in its selection of securities
than a typical equity mutual fund. When attractive investments are identified,
the fund manager expects to establish relatively large positions, sometimes
representing 5% or more of total fund assets. From time to time it would not
be unusual for the fund to emphasize the stocks of small and medium-sized
companies.
In addition to U.S. common stocks, the fund may also purchase other types of
securities, for example, foreign securities, junk bonds, private placements
and warrants, when considered consistent with the fund's investment objective.
The fund is limited with respect to the percentage of assets it can place in
such securities; please refer to Investment Policies and Practices on page 12
for a further discussion of these securities and the limitations imposed on
the fund. The fund may also engage in a variety of investment management
practices, such as buying and selling futures and options.
How are securities for the portfolio identified?
Drawing on its research, T. Rowe Price will generally seek to invest in
companies:
o expected to achieve accelerating earnings growth, perhaps due to strong
demand for their products or services;
o whose securities appear undervalued, based on various measures such as
price/earnings and price/book value ratios, etc.;
o undergoing financial restructuring;
o involved in takeover or arbitrage situations;
o expected to benefit from evolving market cycles or changing economic
conditions; or
o representing special situations, such as changes in management or
favorable regulatory developments, which are expected to lead to higher
earnings and share prices.
What distinguishes the fund from many other stock funds?
Many stock funds follow a particular investment approach or look for
opportunities in particular market sectors. For example, some take a "growth"
approach based on the premise that, when a company's earnings grow faster than
inflation and the economy in general, eventually the market should reward it
with a higher stock price. Others pursue a "value" approach, seeking to buy a
stock when its price is low in relation to what they believe to be its
intrinsic worth. Some limit their search to large- or small-cap stocks, or to
stocks in a particular sector such as natural resources, health care or
technology.
This fund will not be limited to any single approach. Rather, its flexible
strategy will allow it to pursue growth, value or any other opportunities
across the universe of common stocks. This opportunistic approach may result
in an above-average level of trading activity, buying and selling securities
more frequently than other funds do. In addition, the fund's portfolio will
tend to be less diversified than that of the average stock fund.
Will the fund attempt to time swings in the market?
The fund will not make explicit calls on the future direction of the general
market. The fund generally intends to be fully invested. However, if the fund
manager is unable to find attractive situations offering the potential for
significant capital appreciation, the fund may hold above-average levels of
cash reserves for temporary defensive purposes.
_____________________________________________________________________________
THE FUND'S SHARE PRICE WILL FLUCTUATE. WHEN YOU SELL YOUR SHARES, THEIR PRICE
MAY BE HIGHER OR LOWER THAN WHEN YOU PURCHASED THEM.
What are the fund's potential risks?
The fund's risks fall into several categories, including:
o Market risk. Share prices of even the best managed, most profitable
corporations are subject to market risk, which means they can decline.
Swings in investor psychology and/or significant trading by large
institutional investors can also result in price fluctuations.
o Less diversification. The fund will concentrate on fewer issues (perhaps
30 to 50) than is typical of most mutual funds, and may establish
relatively large positions in them. Because of this approach, the fund
has registered as a non-diversified fund. Potential losses could be
greater than for funds investing in a broader variety of issues. See page
13 for further information.
o Flexible strategy. By having the flexibility to invest heavily in
particular securities or industries, the fund may underperform the market
when these sectors are declining faster than the general stock market.
Also, there is no guarantee the fund's flexible approach to investing
will be successful.
o Small stocks. At times, a substantial portion of the portfolio may be in
securities of small companies. The very nature of investing in small
companies involves greater risk than is customarily associated with
larger established companies. Small companies often have limited product
lines, markets or financial resources, and they may be dependent upon a
small group of inexperienced managers. The securities of small companies
may be subject to more abrupt or erratic market declines than securities
of larger companies or the market averages in general.
What are derivatives and can the fund invest in them?
In the broadest sense, a derivative is any security whose value is derived
from underlying securities or a market benchmark. The amount of risk
represented by derivatives varies widely from one to another. The fund can
invest in derivatives to hedge against risks as well as to enhance returns.
Some of the potentially more volatile derivatives the fund may purchase
include futures and options. (For additional information on derivatives and
their potential use by the fund, please see the section beginning on page 12.)
How can I decide if the fund is right for me?
Common stocks in general offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Consider your investment goals, your time horizon for
achieving them, and your tolerance level for risk. If you can accept the
greater risk of investing in an aggressively managed, nondiversified fund in
an effort to achieve superior capital appreciation, the fund can be an
appropriate part of your overall investment strategy.
Is there additional information about the fund to help me decide if it is
appropriate for me?
Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following: Types of Portfolio Securities (common and preferred
stocks, convertible securities and warrants, foreign securities, fixed income
securities, high yield/high risk investing, hybrid instruments, investment
funds and private placements); and Types of Fund Management Practices (cash
position, borrowing money and transferring assets, futures and options,
managing foreign currency risk, lending of portfolio securities and portfolio
transactions).
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in the fund.
_____________________________________________________________________________
THE VARIOUS WAYS YOU CAN BUY, SELL, AND EXCHANGE SHARES ARE EXPLAINED AT THE
END OF THIS PROSPECTUS AND ON THE NEW ACCOUNT FORM.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are priced and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form before 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions are priced may be changed in case of an
emergency or if the New York Stock Exchange closes at a time other than 4 p.m.
ET.
_____________________________________________________________________________
WHEN FILLING OUT THE NEW ACCOUNT FORM, YOU MAY WISH TO GIVE YOURSELF THE
WIDEST RANGE OF OPTIONS FOR RECEIVING PROCEEDS FROM A SALE.
_____________________________________________________________________________
IF FOR SOME REASON WE CANNOT ACCEPT YOUR REQUEST TO SELL SHARES, WE WILL
CONTACT YOU.
How you can receive the proceeds from a sale
If your request is received by 4 p.m. ET in correct form, proceeds are usually
sent on the next business day. Proceeds can be sent to you by mail, or to your
bank account by ACH transfer or bank wire. Proceeds sent by bank wire should
be credited to your bank account the next business day, and proceeds sent by
ACH transfer should be credited the second day after the sale. ACH (Automated
Clearing House) is an automated method of initiating payments from and
receiving payments in your financial institution account. ACH is a payment
system supported by over 20,000 banks, savings banks and credit unions, which
electronically ex-changes the transactions primarily through the Federal
Reserve Banks.
Exception:
o Under certain circumstances and when deemed to be in the fund's best
interests, your proceeds may not be sent for up to five business days
after receiving your sale or exchange request. If you were exchanging
into a bond or money fund, your new investment would not begin to earn
dividends until the sixth business day.
Useful Information on Distributions and Taxes
_____________________________________________________________________________
THE FUND DISTRIBUTES ALL NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS TO
SHAREHOLDERS.
Dividends and other distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding, that
is, you receive dividend and capital gain distributions on a rising number of
shares.
Dividends not reinvested are paid by check or transmitted to your bank account
via ACH. If the Post Office cannot deliver your check, or if your check
remains uncashed for six months, the fund reserves the right to reinvest your
distribution check in your account at the then current NAV and to reinvest all
subsequent distributions in shares of the fund.
Income dividends
o The fund declares and pays dividends (if any) annually.
o All or part of the fund's dividends will be eligible for the 70%
deduction for dividends received by corporations.
Capital gains
o A capital gain or loss is the difference between the purchase and sale
price of a security.
o If a fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month.
Tax information
You need to be aware of the possible tax consequences when
o the fund makes a distribution to your account, or
o you sell fund shares, including an exchange from one fund to another.
_____________________________________________________________________________
THE FUND SENDS TIMELY INFORMATION FOR YOUR TAX FILING NEEDS.
Taxes on fund redemptions. When you sell shares in the fund, you may realize a
gain or loss. An exchange from one fund to another is still a sale for tax
purposes.
In January, the fund will send you Form 1099-B, indicating the date and amount
of each sale you made in the fund during the prior year. This information will
also be reported to the IRS. We will also tell you the average cost of the
shares you sold during the year. Average cost information is not reported to
the IRS, and you do not have to use it. You may calculate the cost basis using
other methods acceptable to the IRS, such as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction (except for systematic purchases and redemptions)
you make and a year-end statement detailing all your transactions in each fund
account during the year.
_____________________________________________________________________________
DISTRIBUTIONS ARE TAXABLE WHETHER REINVESTED IN ADDITIONAL SHARES OR RECEIVED
IN CASH.
Taxes on fund distributions. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until you withdraw
money from them.
In January, the fund will send you Form 1099-DIV indicating the tax status of
any dividend and capital gain distribution made to you. This information will
also be reported to the IRS. All distributions made by the fund are taxable to
you for the year in which they were paid. The only exception is that
distributions declared during the last three months of the year and paid in
January are taxed as though they were paid by December 31. Dividends and
distributions are taxable to you regardless of whether they are taken in cash
or reinvested. The fund will send you any additional information you need to
determine your taxes on fund distributions, such as the portion of your
dividend, if any, that may be exempt from state income taxes.
Short-term capital gains are taxable as ordinary income and long-term gains
are taxable at the applicable long-term gain rate. The gain is long or short
term depending on how long the fund held the securities, not how long you held
shares in the fund. If you realize a loss on the sale or exchange of fund
shares held six months or less, your short-term loss recognized is
reclassified to long-term to the extent of any capital gain distribution
received.
Distributions resulting from the sale of certain foreign currencies and debt
securities, to the extent of foreign exchange gains, are taxed as ordinary
income. If the fund pays nonrefundable taxes to foreign governments during the
year, the taxes will reduce the fund's dividends.
Tax effect of buying shares before a capital gain or dividend distribution. If
you buy shares shortly before or on the "record date"-the date that
establishes you as the person to receive the upcoming distribution-you will
receive in the form of a taxable distribution a portion of the money you just
invested. Therefore, you may wish to find out the fund's record date before
investing. Of course, the fund's share price may reflect undistributed capital
gains or income and unrealized appreciation at any time.
Transaction Procedures and Special Requirements
Purchase Conditions
_____________________________________________________________________________
FOLLOWING THESE PROCEDURES HELPS ASSURE TIMELY AND ACCURATE TRANSACTIONS.
Nonpayment. If your payment is not received or you pay with a check or ACH
transfer that does not clear, your purchase will be cancelled. You will be
responsible for any losses or expenses incurred by the fund or transfer agent,
and the fund can redeem shares you own in this or another identically
registered T. Rowe Price fund as reimbursement. The fund and its agents have
the right to reject or cancel any purchase, exchange, or redemption due to
nonpayment.
U.S. dollars. All purchases must be paid for in U.S. dollars; checks must be
drawn on U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you just purchased and paid for by check
or ACH transfer, the fund will process your redemption but will generally
delay sending you the proceeds for up to 10 calendar days to allow the check
or transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. (The 10-day hold
does not apply to the following purchases paid for by: bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone transactions. Telephone exchange and redemption are established
automatically when you sign the New Account Form unless you check the box
which states that you do not want these services. The fund uses reasonable
procedures (including shareholder identity verification) to confirm that
instructions given by telephone are genuine. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the fund may
be liable for any losses that may result from acting on the instructions
given. All conversations are recorded, and a confirmation is sent promptly
after the telephone transaction.
Redemptions over $250,000. Large sales can adversely affect the portfolio
manager's ability to implement a fund's investment strategy by causing the
premature sale of securities that would otherwise be held. If in any 90-day
period, you redeem (sell) more than $250,000, or your sale amounts to more
than 1% of the fund's net assets, the fund has the right to delay sending your
proceeds for up to five business days after receiving your request, or to pay
the difference between the redemption amount and the lesser of the two
previously mentioned figures with securities from the fund.
_____________________________________________________________________________
T. ROWE PRICE MAY BAR EXCESSIVE TRADERS FROM PURCHASING SHARES.
Excessive Trading
Frequent trades involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. We define "excessive trading" as exceeding
one purchase and sale involving the same fund within any 120-day period.
For example, you are in fund A. You can move substantial assets from A to fund
B, and, within the next 120 days, sell your shares in fund B to return to fund
A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds, 2) redemptions that are not part of
exchanges, and 3) systematic purchases or redemptions (see "Shareholder
Services").
Keeping Your Account Open
Due to the relatively high cost to the fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, the fund has the right to close your
account after giving you 60 days in which to increase your balance.
_____________________________________________________________________________
A SIGNATURE GUARANTEE IS DESIGNED TO PROTECT YOU AND THE FUND FROM FRAUD BY
VERIFYING YOUR SIGNATURE.
Signature Guarantees
You may need to have your signature guaranteed in certain situations, such as:
o Written requests 1) to redeem over $50,000 or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any person, address, or bank account not
on record.
o Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration from yours.
o Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker/dealers and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
3 MORE ABOUT THE FUND
The Fund's Organization and Management
_____________________________________________________________________________
SHAREHOLDERS BENEFIT FROM T. ROWE PRICE'S 57 YEARS OF INVESTMENT MANAGEMENT
EXPERIENCE.
How is the fund organized?
The fund was incorporated in Maryland in 1994, is a non-diversified, open-end
investment company or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specific objectives.
What is meant by "shares"?
As with all mutual funds, investors purchase "shares" when they invest in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o receive a proportional interest in a fund's income and capital gain
distributions;
o cast one vote per share on certain fund matters, including the election
of fund directors, changes in fundamental policies, or approval of
changes in a fund's management contract.
Does the fund have an annual shareholder meeting?
The fund is not required to hold annual meetings and does not intend to do so
except when certain matters, such as a change in a fund's fundamental
policies, are to be decided. In addition, shareholders representing at least
10% of all eligible votes may call a special meeting if they wish for the
purpose of voting on the removal of any fund director. If a meeting is held
and you cannot attend, you can vote by proxy. Before the meeting, the fund
will send you proxy materials that explain the issues to be decided and
include a voting card for you to mail back.
_____________________________________________________________________________
ALL DECISIONS REGARDING THE PURCHASE AND SALE OF FUND INVESTMENTS ARE MADE BY
T. ROWE PRICE ASSOCIATES-SPECIFICALLY BY THE FUND'S PORTFOLIO MANAGERS.
Who runs the fund?
General Oversight. The fund is governed by a Board of Directors that meets
regularly to review the fund's investments, performance, expenses, and other
business affairs. The Board elects the fund's officers. The policy of the fund
is that a majority of Board members will be independent of T. Rowe Price.
Portfolio Management. The fund has an Investment Advisory Committee composed
of the following members: John F. Wakeman, Chairman, John H. Laporte, Brent W.
Clum, David J. Wallack and Brian W.H. Berghuis. The Committee Chairman has
day-to-day responsibility for managing the portfolio and works with the
Committee in developing and executing the fund's investment program. Mr.
Wakeman has been Chairman of the fund's Committee since 1994. Mr. Wakeman
joined T. Rowe Price in 1989 and has been managing investments since 1992.
Marketing. T. Rowe Price Investment Services, Inc., a wholly-owned subsidiary
of T. Rowe Price, distributes (sells) shares of this and all other T. Rowe
Price funds.
Shareholder Services. T. Rowe Price Services, Inc., another wholly-owned
subsidiary, acts as the fund's transfer and dividend disbursing agent and
provides shareholder and administrative services. Services for certain types
of retirement plans are provided by T. Rowe Price Retirement Plan Services,
Inc., also a wholly-owned subsidiary. The address for each is 100 East Pratt
St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
The Management Fee. This fee has two parts-an "individual fund fee" (discussed
on page 2) which reflects the fund's particular investment management costs,
and a "group fee." The group fee, which is designed to reflect the benefits of
the shared resources of the T. Rowe Price investment management complex, is
calculated monthly based on the net combined assets of all T. Rowe Price funds
(except Equity Index and both Spectrum Funds and any institutional or private
label mutual funds). The group fee schedule (shown below) is graduated,
declining as the asset total rises, so shareholders benefit from the overall
growth in mutual fund assets.
0.480% First $1 billion 0.370% Next $1 billion 0.330% Next $10 billion
0.450% Next $1 billion 0.360% Next $2 billion 0.320% Next $10 billion
0.420% Next $1 billion 0.350% Next $2 billion 0.310% Thereafter
0.390% Next $1 billion 0.340% Next $5 billion
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the Price funds described above.
Based on combined Price fund's assets of approximately $35.5 billion at June
30, 1994, the Group Fee was 0.34%.
Understanding Performance Information
This section should help you understand the terms used to describe the fund's
performance. You will come across them in shareholder reports you receive from
us four times a year, in our newsletters, "Insights" reports, in T. Rowe Price
advertisements, and in the media.
_____________________________________________________________________________
TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED PERFORMANCE
INFORMATION IS INCLUDED IN THE FUND'S ANNUAL REPORTS AND QUARTERLY SHAREHOLDER
REPORTS.
Total Return
This tells you how much an investment in the fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the
period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for the fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual, cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
Investing in the Stock Market
Common stocks offer a way to invest for long-term growth of capital. As the
U.S. economy has expanded, corporate profits have grown, and share values have
risen. However, economic growth has been punctuated by periodic declines.
Share prices of even the best managed, most profitable corporations are
subject to market risk, which means their stock prices can decline. For this
reason, equity investors should have a long-term investment horizon and be
willing to wait out bear markets.
Investment Policies and Practices
This section takes a detailed look at some of the types of securities the fund
may hold in its portfolio and the various kinds of investment practices that
may be used in day-to-day portfolio management. The fund's investment program
is subject to further restrictions and risks described in the "Statement of
Additional Information."
Shareholder approval is required to substantively change the fund's objectives
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. The fund adheres to
applicable investment restrictions and policies at the time it makes an
investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth herein. For instance, this
fund is not permitted to invest more than 10% of total assets in hybrid
instruments. While these restrictions provide a useful level of detail about
the fund's investment program, investors should not view them as an accurate
gauge of the potential risk of such investments. For example, in a given
period, a 5% investment in hybrid securities could have significantly more
than a 5% impact on the fund's share price. The net effect of a particular
investment depends on its volatility and the size of its overall return in
relation to the performance of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports we send each
quarter.
_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high risk
derivatives) whose investment characteristics are consistent with the fund's
investment program. These and some of the other investment techniques the fund
may use are described in the following pages.
Fundamental policy: The fund is registered as a non-diversified mutual fund.
This means that the fund may invest a greater portion of its assets in, and
own a greater amount of the voting securities of, a single company than a
diversified fund which may subject the fund to greater risk with respect to
its portfolio securities. However, because the fund intends to qualify as a
"regulated investment company" under the Internal Revenue Code, it must invest
so that, at the end of each quarter, with respect to 50% of its total assets,
not more than 5% of its assets are invested in the securities of a single
issuer.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the fund may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price any time during the life
of the warrants (generally, two or more years).
Foreign Securities. The fund may invest in foreign securities. These include
non-dollar denominated securities traded outside of the U.S. and dollar
denominated securities traded in the U.S. (such as ADRs). Such investments
increase a portfolio's diversification and may enhance return, but they also
involve some special risks such as exposure to potentially adverse local
political and economic developments; nationalization and exchange controls;
potentially lower liquidity and higher volatility; possible problems arising
from accounting, disclosure, settlement, and regulatory practices that differ
from U.S. standards; and the chance that fluctuations in foreign exchange
rates will decrease the investment's value (favorable changes can increase its
value).
Operating policy: The fund may invest up to 20% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities. The fund may invest in debt securities of any type
without regard to quality or rating. Such securities would be purchased in
companies which meet the investment criteria for the fund. The price of a bond
fluctuates with changes in interest rates, rising when interest rates fall and
falling when interest rates rise.
High Yield/High Risk Investing. The total return and yield of lower quality
(high yield/high risk) bonds commonly referred to as "junk bonds," can be
expected to fluctuate more than the total return and yield of higher quality,
shorter-term bonds, but not as much as common stocks. Junk bonds (those rated
below BBB or in default) are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments.
Operating policy: The fund will not purchase a non-investment grade debt
security (or junk bonds) if immediately after such purchase the fund would
have more than 10% of its total assets invested in such securities.
Hybrid Instruments. These instruments (a type of derivative) can combine the
characteristics of securities, futures and options. For example, the principal
amount, redemption or conversion terms of a security could be related to the
market price of some commodity, currency or securities index. Such securities
may bear interest or pay dividends at below market (or even relatively
nominal) rates. Under certain conditions, the redemption value of such an
investment could be zero. Hybrids can have volatile prices and limited
liquidity and their use by the fund may not be successful.
Operating policy: The fund may invest up to 10% of its total assets in hybrid
instruments.
Investment Funds. The fund may invest in other investment funds or companies,
primarily where such investments would be the only practical means of
investing in certain foreign countries. Such investments would result in the
funds paying additional or duplicative fees and expenses. The risks of such
investment would reflect the risks of investing in the types of securities in
which the investment funds or companies invest.
Operating policy: The fund may invest up to 10% of its assets in other
investment funds and companies.
Private Placements (Restricted Securities). These securities are sold directly
to a small number of investors, usually institutions. Unlike public offerings,
such securities are not registered with the SEC. Although certain of these
securities may be readily sold, for example under Rule 144A, others may be
illiquid and their sale may involve substantial delays and additional costs.
Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities and no more than 10% of its total assets in certain
restricted securities.
Types of Management Practices
_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Cash position. The fund will hold a certain portion of its assets in U.S. and
foreign dollar denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or
less. For temporary, defensive purposes, the fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments, and serves
as a short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets. The fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objective and program. Such borrowings may be collateralized with fund assets,
subject to restrictions.
Fundamental policy: Borrowings may not exceed 33 1/3% of the fund's total
assets.
Operating policies: The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the fund's
total assets. The fund may not purchase additional securities when borrowings
exceed 5% of total assets.
_____________________________________________________________________________
FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.
Futures and Options. Futures (a type of derivative) are often used to manage
or hedge risk, because they enable the investor to buy or sell an asset in the
future at an agreed upon price. Options (another type of derivative) give the
investor the right, but not the obligation, to buy or sell an asset at a
predetermined price in the future. The Fund may buy and sell futures contracts
(and options on such contracts) for any number of reasons including: to manage
its exposure to changes in securities prices and foreign currencies; as an
efficient means of adjusting its overall exposure to certain markets; and to
protect portfolio value. The fund may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the fund's total return
and the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
Operating policies: Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of a fund's net
asset value. Options on securities: The total market value of securities
against which a fund has written call or put options may not exceed 25% of its
total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Managing Foreign Currency Risk. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." Although foreign currency transactions will
be used primarily to protect a fund's foreign securities from adverse currency
movements relative to the dollar, they involve the risk that anticipated
currency movements will not occur and a fund's total return could be reduced.
Lending of Portfolio Securities. Like other mutual funds, the fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the fund could experience
delays in recovering their securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not exceed 33 1/3% of a
fund's total assets.
Portfolio Transactions. The fund will not generally trade in securities
(either common stocks or bonds) for short-term profits, but, when
circumstances warrant, securities may be purchased and sold without regard to
the length of time held. The portfolio turnover rate of the fund is not
expected to exceed 150%.
4 INVESTING WITH T. ROWE PRICE
Meeting Requirements for New Accounts
_____________________________________________________________________________
ALWAYS VERIFY YOUR TRANSACTIONS BY CAREFULLY REVIEWING THE CONFIRMATION WE
SEND YOU. PLEASE REPORT ANY DISCREPANCIES TO SHAREHOLDER SERVICES.
Tax Identification Number
We must have your correct social security or corporate tax identification
number and a signed New Account Form or W-9 Form. Otherwise, federal law
requires the funds to withhold a percentage (currently 31%) of your dividends,
capital gain distributions, and redemptions, and may subject you to an IRS
fine. You will also be prohibited from opening another account by exchange. If
this information is not received within 60 days after your account is
established, your account may be redeemed, priced at the NAV on the date of
redemption.
Unless you request otherwise, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same zip
code and to shareholders who have requested that their account be combined
with someone else's for financial reporting.
Opening a New Account: $2,500 minimum initial investment; $1,000 for
retirement or gifts or transfers to minors (UGMA/ UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name
and account type would have to be identical.)
_____________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE
ACCOUNT SERVICES
P.O. BOX 17300
BALTIMORE, MD
21298-9353
MAILGRAM, EXPRESS,
REGISTERED, OR CERTIFIED MAIL
T. ROWE PRICE
ACCOUNT SERVICES
10090 RED RUN BLVD.
OWINGS MILLS, MD 21117
By Mail
Please make your check payable to T. Rowe Price Funds otherwise it will be
returned (we do not accept third party checks to open new accounts) and send
it together with the New Account Form to the address at left.
By Wire
o Call Investor Services for an account number and give the following wire
address to your bank: Morgan Guaranty Trust Co. of New York, ABA#
021000238, T. Rowe Price [fund name], AC-00153938. Provide fund name,
account name(s), and account number.
o Complete a New Account Form and mail it to one of the appropriate
addresses listed at left.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services. The new account will have the same registration as
the account from which you are exchanging. Services for the new account may be
carried over by telephone request if preauthorized on the existing account.
(See explanation of "Excessive Trading" under "Transaction Procedures.")
In Person
Drop off your New Account Form at any of the locations listed below and obtain
a receipt.
Drop-off locations
101 East T. Rowe Price Farragut Square ARCO Tower
Lombard St. Financial Center 900 17th St., N.W. 31st Floor
Baltimore, MD 10090 Red Run Blvd. Washington, D.C. 515 South Flower St.
Owings Mills, MD Los Angeles, CA
Note: The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; cancel or
rescind any purchase or exchange upon notice to the shareholder within five
business days of the trade or if the written confirmation has not been
received by the shareholder, whichever is sooner (for example, if an account
has been restricted due to excessive trading or fraud); to otherwise modify
the conditions of purchase or any services at any time; or to act on
instructions believed to be genuine.
Purchasing Additional Shares: $100 minimum purchase; $50 minimum for
retirement plans and Automatic Asset Builder; $5,000 minimum for telephone
purchases
By ACH Transfer
Use Tele*Access(registered trademark), PC*Access(registered trademark) or call
Investor Services if you have established electronic transfers using the ACH
network.
By Wire
Call Shareholder Services or use the wire address in "Opening a New Account."
_____________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE FUNDS
ACCOUNT SERVICES
P.O. BOX 89000
BALTIMORE, MD
21289-1500
By Mail
o Provide your account number and the fund name on your check.
o Mail the check to us at the address shown at left either with a
reinvestment slip or a note indicating the fund and account number in
which you wish to purchase shares.
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form ($50 minimum).
By Phone
Call Shareholder Services to lock in that day's closing price; payment is due
within five days ($5,000 minimum). Note: The current collected balance in your
fund account must equal at least 25% of your telephone purchase for additional
shares.
Exchanging and Redeeming Shares
By Phone
Call Shareholder Services. If you find our phones busy during unusually
volatile markets, please consider placing your order by Tele*Access, PC*Access
or mailgram (if you have previously authorized telephone services), or by
express mail. For exchange policies, please see "Transaction Procedures and
Special Requirements - Excessive Trading."
Redemption proceeds can be mailed to your account address, sent by ACH
transfer, or wired to your bank. For charges, see "Electronic Transfers - By
Wire" on page 20.
_____________________________________________________________________________
MAILGRAM, EXPRESS,
REGISTERED, OR
CERTIFIED MAIL
(SEE PAGE 17.)
By Mail
Provide account name(s) and numbers, fund name(s), and exchange or redemption
amount. For exchanges, mail to the appropriate address below, indicate the
fund you are exchanging from and the fund(s) you are exchanging into. T. Rowe
Price requires the signatures of all owners exactly as registered, and
possibly a signature guarantee (see "Transaction Procedures and Special
Requirements-Signature Guarantees").
Regular Mail
For non-retirement and IRA accounts:
T. Rowe Price Account Services
P.O. Box 89000
Baltimore, MD 21289-0220
For employer-sponsored retirement accounts:
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
_____________________________________________________________________________
T. ROWE PRICE TRUST COMPANY
1-800-492-7670
1-410-625-6585
Note: Redemptions from retirement accounts, including IRAs, must be in
writing. Please call Shareholder Services to obtain an IRA Distribution
Request Form. For employer-sponsored retirement accounts, call T. Rowe Price
Trust Company or your plan administrator for instructions.
Shareholder Services
_____________________________________________________________________________
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically and others you must authorize on the New Account Form.
By signing up for services on the New Account Form rather than later, you
avoid having to complete a separate form and obtain a signature guarantee.
This section reviews some of the principal services currently offered. Our
Services Guide contains detailed descriptions of these and other services. If
you are a new T. Rowe Price investor, you will receive a Services Guide with
our Welcome Kit. Note: Corporate and other institutional accounts require an
original or certified resolution to establish services and to redeem by mail.
For more information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals and institutions, including
large and small businesses: IRAs, SEP-IRAs, Keoghs (profit sharing, money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call
Investor Services. For information on all other retirement plans, please call
our Trust Company at 1-800-492-7670.
_____________________________________________________________________________
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
Exchange Service
You can move money from one account to an existing identically registered
account, or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund
are limited to investors living in states where the funds are registered.)
Some of the T. Rowe Price funds may impose a redemption fee of .50% to 2%,
payable to such funds, on shares held for less than one year, or in some
funds, six months.
Note: Shares purchased by telephone may not be exchanged to another fund until
payment for the original purchase has been received.
Automated Services
Tele*Access. 24-hour service via toll-free number provides information such
as yields, prices, dividends, account balances, and your latest transaction as
well as the ability to request prospectuses and account forms and initiate
purchase, redemption and exchange orders in your accounts (see "Electronic
Transfers" below).
PC*Access. 24-hour service via dial-up modem provides the same information as
Tele*Access, but on a personal computer. Please call Investor Services for an
information guide.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our four investor center locations. For Investor Center
addresses, see "Drop-off locations" on page 18.
Electronic Transfers
By ACH. With no charges to pay, you can initiate a purchase or redemption for
as little as $100 or as much as $100,000 between your bank account and fund
account using the ACH network. Enter instructions via Tele*Access, PC*Access
or call Shareholder Services.
By Wire. Electronic transfers can also be conducted via bank wire. There is
currently a $5 fee for wire redemptions under $5,000, and your bank may charge
for incoming or outgoing wire transfers regardless of size.
Automatic Investing ($50 minimum)
You can invest automatically in several different ways, including:
o Automatic Asset Builder. You instruct us to move $50 or more once a
month or less often from your bank account, or you can instruct your
employer to send all or a portion of your paycheck to the fund or funds
you designate.
o Automatic Exchange. Enables you to set up systematic investments from one
fund account into another, such as from a money fund into a stock fund.
Discount Brokerage
You can trade stocks, bonds, options, precious metals and other securities at
a substantial savings over regular commission rates. Call Investor Services
for information.
Note: If you buy or sell T. Rowe Price Funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you may be charged transaction or
service fees by those institutions. No such fees are charged by T. Rowe Price
Investment Services or the fund for transactions conducted directly with the
fund.
PAGE 2
The Statement of Additional Information for the T. Rowe Price
Capital Opportunity Fund, Inc., dated May 1, 1994, amended to
September 29, 1994 and November 29, 1994, should be inserted
here.
PAGE 1
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE VALUE FUND, INC.
(collectively the "Funds" and individually the "Fund")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the appropriate
Funds' prospectus dated May 1, 1994, September 29, 1994 (for the
Value Fund), or November 29, 1994 (for the Capital Opportunity
Fund) which may be obtained from T. Rowe Price Investment
Services, Inc., 100 East Pratt Street, Baltimore, Maryland 21202.
If you would like a prospectus for a Fund of which you are
not a shareholder, please call 1-800-638-5660. A prospectus with
more complete information, including management fees and expenses
will be sent to you. Please read it carefully.
The date of this Statement of Additional Information is May
1, 1994, amended to September 29, 1994, and November 29, 1994.
PAGE 2
TABLE OF CONTENTS
Page Page
Asset-Backed Securities . . Lending of Portfolio
Capital Stock . . . . . . . Securities . . . . . . .
Custodian . . . . . . . . . Management of Fund . . .
Code of Ethics . . . . . . Mortgage-Related
Distributor for Fund . . . Securities
Dividends and . . . . . . . Net Asset Value Per
Distributions . . . . . . Share . . . . . . . . .
Federal and State . . . . . Options . . . . . . . . .
Registration of Shares . . Organization of the Fund
Foreign Currency . . . . . Portfolio Management
Transactions . . . . . . . Practices . . . . . . .
Foreign Futures and . . . . Portfolio Transactions .
Options . . . . . . . . . Pricing of Securities . .
Foreign Securities . . . . Principal Holders of
Futures Contracts . . . . . Securities . . . . . . .
Hybrid Instruments . . . . Ratings of Corporate
Independent Accountants . . Debt Securities . . . .
Illiquid or Restricted . . Repurchase Agreements . .
Securities . . . . . . . . Risk Factors . . . . . .
Investment Management . . . Tax Status . . . . . . .
Services . . . . . . . . . Taxation of Foreign
Investment Objectives . . . Shareholders . . . . . .
and Policies . . . . . . . Warrants . . . . . . . .
Investment Performance . . When-Issued Securities and
Investment Program . . . . Forward Commitment
Investment Restrictions . . Contracts . . . . . . .
Legal Counsel . . . . . . . Yield Information . . . .
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objectives and policies discussed in each
Fund's prospectus. The Funds will not make a material change in
their investment objectives without obtaining shareholder
approval. Unless otherwise specified, the investment programs
and restrictions of the Funds are not fundamental policies. Each
Fund's operating policies are subject to change by each Board of
Directors/Trustees without shareholder approval. However,
shareholders will be notified of a material change in an
operating policy. Each Fund's fundamental policies may not be
changed without the approval of at least a majority of the
outstanding shares of the Fund or, if it is less, 67% of the
PAGE 3
shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
Throughout this Statement of Additional Information, "the
Fund" is intended to refer to each Fund listed on the cover page,
unless otherwise indicated.
RISK FACTORS
General
Because of its investment policy, the Fund may or may not be
suitable or appropriate for all investors. The Fund is not a
money market fund and is not an appropriate investment for those
whose primary objective is principal stability. The Fund will
normally have substantially all (for the Balanced Fund 50-70%) of
its assets in equity securities (e.g., common stocks). This
portion of the Fund's assets will be subject to all of the risks
of investing in the stock market. There is risk in all
investment. The value of the portfolio securities of the Fund
will fluctuate based upon market conditions. Although the Fund
seeks to reduce risk by investing in a diversified portfolio,
such diversification does not eliminate all risk. There can, of
course, be no assurance that the Fund will achieve its investment
objective. Reference is also made to the sections entitled
"Types of Securities" and "Portfolio Management Practices" for
discussions of the risks associated with the investments and
practices described therein as they apply to the Fund.
Debt Obligations
Although substantially all of the Fund's assets are invested
in common stocks (for the Balanced Fund 50-70%), the Fund may
invest in convertible securities, corporate debt securities and
preferred stocks which hold the prospect of contributing to the
achievement of the Fund's objectives. Yields on short,
intermediate, and long-term securities are dependent on a variety
of factors, including the general conditions of the money and
bond markets, the size of a particular offering, the maturity of
the obligation, and the credit quality and rating of the issue.
Debt securities with longer maturities tend to have higher yields
and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter
maturities and lower yields. The market prices of debt
securities usually vary, depending upon available yields. An
increase in interest rates will generally reduce the value of
PAGE 4
portfolio investments, and a decline in interest rates will
generally increase the value of portfolio investments. The
ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of the debt
securities in which the Fund invests to meet their obligations
for the payment of interest and principal when due. The Fund's
investment program permits it to purchase below investment grade
securities. Since investors generally perceive that there are
greater risks associated with investment in lower quality
securities, the yields from such securities normally exceed those
obtainable from higher quality securities. However, the
principal value of lower-rated securities generally will
fluctuate more widely than higher quality securities. Lower
quality investments entail a higher risk of default--that is, the
nonpayment of interest and principal by the issuer than higher
quality investments. Such securities are also subject to special
risks, discussed below. Although the Fund seeks to reduce risk
by portfolio diversification, credit analysis, and attention to
trends in the economy, industries and financial markets, such
efforts will not eliminate all risk. There can, of course, be no
assurance that the Fund will achieve its investment objective.
After purchase by the Fund, a debt security may cease to be
rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require a sale of such
security by the Fund. However, T. Rowe Price will consider such
event in its determination of whether the Fund should continue to
hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance
with the investment policies contained in the prospectus.
Special Risks of High Yield Investing
The Fund may invest in low quality bonds commonly referred
to as "junk bonds." Junk bonds are regarded as predominantly
speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low
and lower-medium quality bonds involves greater investment risk,
to the extent the Fund invests in such bonds, achievement of its
investment objective will be more dependent on T. Rowe Price's
credit analysis than would be the case if the Fund was investing
in higher quality bonds. High yield bonds may be more
susceptible to real or perceived adverse economic conditions than
investment grade bonds. A projection of an economic downturn, or
PAGE 5
higher interest rates, for example, could cause a decline in high
yield bond prices because the advent of such events could lessen
the ability of highly leverage issuers to make principal and
interest payments on their debt securities. In addition, the
secondary trading market for high yield bonds may be less liquid
than the market for higher grade bonds, which can adversely
affect the ability of a Fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be
more difficult to value inasmuch as objective pricing data may be
less available and judgment may play a greater role in the
valuation process.
Foreign Securities
The Fund may invest in U.S. dollar-denominated and non U.S.
dollar-denominated securities of foreign issuers.
Risk Factors of Foreign Investing
There are special risks in foreign investing. Certain of
these risks are inherent in any international mutual fund while
others relate more to the countries in which the Funds will
invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries
of Southeast Asia, Latin America, Eastern Europe and the Middle
East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a
per capita gross national product of less than $8,000.
Political and Economic Factors. Individual foreign
economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as
growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are
not as stable as in the United States. For example, in 1991, the
existing government in Thailand was overthrown in a military
coup. In 1992, there were two military coup attempts in
Venezuela and in 1992 the President of Brazil was impeached. In
addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim
sovereignty of one another and there is a demilitarized border
between North and South Korea.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest
PAGE 6
or regulation, in their respective economies. Action by these
governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many
foreign countries are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and
economic conditions of their trading partners. The enactment by
these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of
such countries.
Currency Fluctuations. The Funds will invest in securities
denominated in various currencies. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Funds'
assets denominated in that currency. Such changes will also
affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of
the Fund's securities denominated in that currency will rise.
When a given currency depreciates against the dollar (the dollar
strengthens) the value of the Funds' securities denominated in
that currency would be expected to decline.
Investment and Repatriation of Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment in
certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These
restrictions may take the form of prior governmental approval,
limits on the amount or type of securities held by foreigners,
and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest.
In addition, the repatriation of both investment income and
capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the
need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. It is contemplated that most
foreign securities, other than Latin American securities, will be
purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal
offices of the issuers of the various securities are located, if
that is the best available market. Currently, it is anticipated
that many Latin American investments will be made through ADRs
PAGE 7
traded in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they
usually have substantially less volume than U.S. markets and the
Funds' portfolio securities may be less liquid and subject to
more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at
price/earnings multiples higher than comparable United States
securities and such levels may not be sustainable. Fixed
commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although the
Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may
differ from those in United States markets. Such differences may
include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to a Fund.
Investment Funds. The Funds may invest in investment funds
which have been authorized by the governments of certain
countries specifically to permit foreign investment in securities
of companies listed and traded on the stock exchanges in these
respective countries. If the Funds invest in such investment
funds, the Funds' shareholders will bear not only their
proportionate share of the expenses of the Funds (including
operating expenses and the fees of the investment manager), but
also will bear indirectly similar expenses of the underlying
investment funds. In addition, the securities of these
investment funds may trade at a premium over their net asset
value.
Information and Supervision. There is generally less
publicly available information about foreign companies comparable
to reports and ratings that are published about companies in the
United States. Foreign companies are also generally not subject
to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those
applicable to United States companies. It also may be more
difficult to keep currently informed of corporate actions which
affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the
Funds' foreign portfolio securities may be subject to foreign
PAGE 8
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a
credit or deduction for U.S. federal income tax purposes for his
or her proportionate share of such foreign taxes paid by the
Funds. (See "Tax Status," page 57.)
Other. With respect to certain foreign countries,
especially developing and emerging ones, there is the possibility
of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable
market value relative to the established currencies of western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property.
In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of a Fund's assets invested in
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk. To the extent
any securities issued by companies in Eastern Europe and Russia
PAGE 9
are considered illiquid, each Fund will be required to include
such securities within its 15% restriction on investing in
illiquid securities.
INVESTMENT PROGRAM
Types of Securities
Set forth below is additional information about certain of
the investments described in the Fund's prospectus.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to
which a registration statement is in effect under the Securities
Act of 1933 (the "1933 Act"). Where registration is required,
the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to
sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair
value as determined in accordance with procedures prescribed by
the Fund's Board of Directors/Trustees. If through the
appreciation of illiquid securities or the depreciation of liquid
securities, the Fund should be in a position where more than 15%
of the value of its net assets is invested in illiquid assets,
including restricted securities, the Fund will take appropriate
steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities
which, while privately placed, are eligible for purchase and sale
under Rule 144A under the 1933 Act. This rule permits certain
qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not
registered under the 1933 Act. T. Rowe Price under the
supervision of the Fund's Board of Directors/Trustees, will
consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Fund's restriction of investing
no more than 15% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, T. Rowe Price
will consider the trading markets for the specific security
taking into account the unregistered nature of a Rule 144A
PAGE 10
security. In addition, T. Rowe Price could consider the (1)
frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market,
and (4) the nature of the security and of marketplace trades
(e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity
of Rule 144A securities would be monitored, and if as a result of
changed conditions it is determined that a Rule 144A security is
no longer liquid, the Fund's holdings of illiquid securities
would be reviewed to determine what, if any, steps are required
to assure that the Fund does not invest more than 15% of its net
assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Hybrid Instruments
Hybrid Instruments have been developed and combine the
elements of futures contracts, options or other financial
instruments with those of debt, preferred equity or a depository
instrument (hereinafter "Hybrid Instruments"). Generally, a
Hybrid Instrument will be a debt security, preferred stock,
depository share, trust certificate, certificate of deposit or
other evidence of indebtedness on which a portion of or all
interest payments, and/or the principal or stated amount payable
at maturity, redemption or retirement, is determined by reference
to prices, changes in prices, or differences between prices, of
securities, currencies, intangibles, goods, articles or
commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as
interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid
Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments
or redemption terms determined by reference to the value of a
currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference
to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating
exposure to a particular market, or segment of a market, with the
objective of enhancing total return. For example, a Fund may
wish to take advantage of expected declines in interest rates in
several European countries, but avoid the transactions costs
associated with buying and currency-hedging the foreign bond
PAGE 11
positions. One solution would be to purchase a U.S. dollar-
denominated Hybrid Instrument whose redemption price is linked to
the average three year interest rate in a designated group of
countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was
lower than a specified level, and payoffs of less than par if
rates were above the specified level. Furthermore, the Fund
could limit the downside risk of the security by establishing a
minimum redemption price so that the principal paid at maturity
could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this
arrangement, known as a structured security with an embedded put
option, would be to give the Fund the desired European bond
exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the Fund could
lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the
Hybrid.
The risks of investing in Hybrid Instruments reflect a
combination of the risks of investing in securities, options,
futures and currencies. Thus, an investment in a Hybrid
Instrument may entail significant risks that are not associated
with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars or
bears interest either at a fixed rate or a floating rate
determined by reference to a common, nationally published
Benchmark. The risks of a particular Hybrid Instrument will, of
course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the
instrument is linked. Such risks generally depend upon factors
which are unrelated to the operations or credit quality of the
issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events,
the supply and demand for the Underlying Assets and interest rate
movements. In recent years, various Benchmarks and prices for
Underlying Assets have been highly volatile, and such volatility
may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for
a discussion of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry
greater market risks than traditional debt instruments.
Depending on the structure of the particular Hybrid Instrument,
changes in a Benchmark may be magnified by the terms of the
PAGE 12
Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices
of the Hybrid Instrument and the Benchmark or Underlying Asset
may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred
dividends at below market (or even relatively nominal) rates.
Alternatively, Hybrid Instruments may bear interest at above
market rates but bear an increased risk of principal loss (or
gain). The latter scenario may result if "leverage" is used to
structure the Hybrid Instrument. Leverage risk occurs when the
Hybrid Instrument is structured so that a given change in a
Benchmark or Underlying Asset is multiplied to produce a greater
value change in the Hybrid Instrument, thereby magnifying the
risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the
instruments are often "customized" to meet the portfolio needs of
a particular investor, and therefore, the number of investors
that are willing and able to buy such instruments in the
secondary market may be smaller than that for more traditional
debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market
without the guarantee of a central clearing organization or in a
transaction between the Fund and the issuer of the Hybrid
Instrument, the creditworthiness of the counter party or issuer
of the Hybrid Instrument would be an additional risk factor which
the Fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the
trading of commodity futures by U.S. persons, the SEC, which
regulates the offer and sale of securities by and to U.S.
persons, or any other governmental regulatory authority.
The various risks discussed above, particularly the market
risk of such instruments, may in turn cause significant
fluctuations in the net asset value of the Fund. Accordingly,
the Fund will limit its investments in Hybrid Instruments to 10%
of net assets. However, because of their volatility, it is
possible that the Fund's investment in Hybrid Instruments will
account for more than 10% of the Fund's return (positive or
negative).
Warrants
The Fund may acquire in warrants. Warrants are pure
speculation in that they have no voting rights, pay no dividends
PAGE 13
and have no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but
only the right to buy them. Warrants differ from call options in
that warrants are issued by the issuer of the security which may
be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying
securities.
Balanced, Blue Chip Growth, Capital Appreciation, Capital
Opportunity, Dividend Growth, Equity Income, Growth & Income, New
Era, OTC, Small-Cap Value and Value Funds
Fixed income securities in which the Fund may invest
include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in the
length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by
U.S. Government sponsored enterprises and federal agencies.
These include securities issued by the Federal National Mortgage
Association, Government National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration,
Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury; and the remainder are supported only by the credit of
the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers'
acceptances, and other short-term debt obligations. Certificates
of deposit are short-term obligations of commercial banks. A
bankers' acceptance is a time draft drawn on a commercial bank by
a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of
U.S. banks, U.S. branches of foreign banks, and foreign branches
of foreign banks.
PAGE 14
Short-Term Corporate Debt Securities. Outstanding
nonconvertible corporate debt securities (e.g., bonds and
debentures) which have one year or less remaining to maturity.
Corporate notes may have fixed, variable, or floating rates.
Commercial Paper. Short-term promissory notes issued by
corporations primarily to finance short-term credit needs.
Certain notes may have floating or variable rates.
Foreign Government Securities. Issued or guaranteed by a
foreign government, province, instrumentality, political
subdivision or similar unit thereof.
Savings and Loan Obligations. Negotiable certificates of
deposit and other short-term debt obligations of savings and loan
associations.
Supranational Agencies. Securities of certain supranational
entities, such as the International Development Bank.
When-Issued Securities and Forward Commitment Contracts
The Fund may purchase securities on a "when-issued" or
delayed delivery basis ("When-Issueds") and may purchase
securities on a forward commitment basis ("Forwards"). Any or
all of the Fund's investments in debt securities may be in the
form of When-Issueds and Forwards. The price of such securities,
which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs
within 90 days of the purchase for When-Issueds, but may be
substantially longer for Forwards. During the period between
purchase and settlement, no payment is made by the Fund to the
issuer and no interest accrues to the Fund. The purchase of
these securities will result in a loss if their value declines
prior to the settlement date. This could occur, for example, if
interest rates increase prior to settlement. The longer the
period between purchase and settlement, the greater the risks
are. At the time the Fund makes the commitment to purchase these
securities, it will record the transaction and reflect the value
of the security in determining its net asset value. The Fund
will cover these securities by maintaining cash and/or liquid,
high-grade debt securities with its custodian bank equal in value
to commitments for them during the time between the purchase and
the settlement. Therefore, the longer this period, the longer
the period during which alternative investment options are not
available to the Fund (to the extent of the securities used for
PAGE 15
cover). Such securities either will mature or, if necessary, be
sold on or before the settlement date.
To the extent the Fund remains fully or almost fully
invested (in securities with a remaining maturity or more than
one year) at the same time it purchases these securities, there
will be greater fluctuations in the Fund's net asset value than
if the Fund did not purchase them.
Collateralized Mortgage Obligations (CMOs)
CMOs are bonds that are collateralized by whole loan
mortgages or mortgage pass-through securities. The bonds issued
in a CMO deal are divided into groups, and each group of bonds is
referred to as a "tranche." Under the traditional CMO structure,
the cash flows generated by the mortgages or mortgage pass-
through securities in the collateral pool are used to first pay
interest and then pay principal to the CMO bondholders. The
bonds issued under a CMO structure are retired sequentially as
opposed to the pro rata return of principal found in traditional
pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying
collateral (to the extent it exceeds the amount required to pay
the stated interest) is used to retire the bonds. Under the CMO
structure, the repayment of principal among the different
tranches is prioritized in accordance with the terms of the
particular CMO issuance. The "fastest-pay" tranche of bonds, as
specified in the prospectus for the issuance, would initially
receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as
specified in the prospectus, receive all of the principal
payments until they are retired. The sequential retirement of
bond groups continues until the last tranche, or group of bonds,
is retired. Accordingly, the CMO structure allows the issuer to
use cash flows of long maturity, monthly-pay collateral to
formulate securities with short, intermediate and long final
maturities and expected average lives.
In recent years, new types of CMO structures have evolved.
These include floating rate CMOs, planned amortization classes,
accrual bonds and CMO residuals. These newer structures affect
the amount and timing of principal and interest received by each
tranche from the underlying collateral. Under certain of these
new structures, given classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which the Fund
invests, the investment may be subject to a greater or lesser
PAGE 16
risk of prepayment than other types of mortgage-related
securities.
The primary risk of any mortgage security is the uncertainty
of the timing of cash flows. For CMOs, the primary risk results
from the rate of prepayments on the underlying mortgages serving
as collateral. An increase or decrease in prepayment rates
(resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life and price of CMOs.
The prices of certain CMOs, depending on their structure and the
rate of prepayments, can be volatile. Some CMOs may also not be
as liquid as other securities.
Stripped Agency Mortgage-Backed Securities
Stripped Agency Mortgage-Backed securities represent
interests in a pool of mortgages, the cash flow of which has been
separated into its interest and principal components. "IOs"
(interest only securities) receive the interest portion of the
cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Agency Mortgage-Backed Securities
may be issued by U.S. Government Agencies or by private issuers
similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates
rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other
mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared
to interest rates. Under the Internal Revenue Code of 1986, as
amended (the "Code"), POs may generate taxable income from the
current accrual of original issue discount, without a
corresponding distribution of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely
sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For
example, a rapid or slow rate of principal payments may have a
material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor
may fail to recoup fully its initial investment in an IO class of
a stripped mortgage-backed security, even if the IO class is
rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments of principal, the
price on a PO class will be affected more severely than would be
the case with a traditional mortgage-backed security.
PAGE 17
The staff of the Securities and Exchange Commission has
advised the Fund that it believes the Fund should treat IOs and
POs, other than government-issued IOs or POs backed by fixed rate
mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid
securities, to 15% of the Fund's net assets. Under the Staff's
position, the determination of whether a particular
government-issued IO and PO backed by fixed rate mortgages may be
made on a case by case basis under guidelines and standards
established by the Fund's Board of Directors/Trustees. The
Fund's Board of Directors/Trustees has delegated to T. Rowe Price
the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of
collateral, including age and prepayment characteristics; rate of
interest on coupon relative to current market rates and the
effect of the rate on the potential for prepayments; complexity
of the issue's structure, including the number of tranches; size
of the issue and the number of dealers who make a market in the
IO or PO. The Fund will treat non-government-issued IOs and POs
not backed by fixed or adjustable rate mortgages as illiquid
unless and until the Securities and Exchange Commission modifies
its position.
Asset-Backed Securities
The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated
from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support
provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of
principal payments received on the underlying assets which in
turn may be affected by a variety of economic and other factors.
As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be
more or less than the anticipated yield to maturity. Asset-
backed securities may be classified as pass-through certificates
or collateralized obligations.
Pass-through certificates are asset-backed securities which
represent an undivided fractional ownership interest in an
underlying pool of assets. Pass-through certificates usually
provide for payments of principal and interest received to be
passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool.
PAGE 18
Because pass-through certificates represent an ownership interest
in the underlying assets, the holders thereof bear directly the
risk of any defaults by the obligors on the underlying assets not
covered by any credit support. See "Types of Credit Support".
Asset-backed securities issued in the form of debt
instruments, also known as collateralized obligations, are
generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card
or automobile receivables. The assets collateralizing such
asset-backed securities are pledged to a trustee or custodian for
the benefit of the holders thereof. Such issuers generally hold
no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments
on such asset-backed securities are obligations of the issuers,
in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing
entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed
securities are issued with only one class of security, many
asset-backed securities are issued in more than one class, each
with different payment terms. Multiple class asset-backed
securities are issued for two main reasons. First, multiple
classes may be used as a method of providing credit support.
This is accomplished typically through creation of one or more
classes whose right to payments on the asset-backed security is
made subordinate to the right to such payments of the remaining
class or classes. See "Types of Credit Support". Second,
multiple classes may permit the issuance of securities with
payment terms, interest rates or other characteristics differing
both from those of each other and from those of the underlying
assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests
with respect to the allocation of interest and principal of the
assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of
non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark
changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the
underlying assets are allocated in a manner different than those
described above may be issued in the future. The Fund may invest
in such asset-backed securities if such investment is otherwise
PAGE 19
consistent with its investment objectives and policies and with
the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often
backed by a pool of assets representing the obligations of a
number of different parties. To lessen the effect of failures by
obligors on underlying assets to make payments, such securities
may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to
ensure that scheduled payments on the underlying pool are made in
a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained from
third parties, through various means of structuring the
transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising
out of the structure of the transaction include "senior-
subordinated securities" (multiple class asset-backed securities
with certain classes subordinate to other classes as to the
payment of principal thereon, with the result that defaults on
the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have
"reserve funds" (where cash or investments, sometimes funded from
a portion of the initial payments on the underlying assets, are
held in reserve against future losses) or that have been "over
collateralized" (where the scheduled payments on, or the
principal amount of, the underlying assets substantially exceeds
that required to make payment of the asset-backed securities and
pay any servicing or other fees). The degree of credit support
provided on each issue is based generally on historical
information respecting the level of credit risk associated with
such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-
backed security.
Automobile Receivable Securities. The Fund may invest in
Asset Backed Securities which are backed by receivables from
motor vehicle installment sales contracts or installment loans
secured by motor vehicles ("Automobile Receivable Securities").
Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts")
typically have shorter durations and lower incidences of
prepayment, Automobile Receivable Securities generally will
PAGE 20
exhibit a shorter average life and are less susceptible to
prepayment risk.
Most entities that issue Automobile Receivable Securities
create an enforceable interest in their respective Automobile
Contracts only by filing a financing statement and by having the
servicer of the Automobile Contracts, which is usually the
originator of the Automobile Contracts, take custody thereof. In
such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in
violation of its obligation not to do so, there is a risk that
such party could acquire an interest in the Automobile Contracts
superior to that of the holders of Automobile Receivable
Securities. Also although most Automobile Contracts grant a
security interest in the motor vehicle being financed, in most
states the security interest in a motor vehicle must be noted on
the certificate of title to create an enforceable security
interest against competing claims of other parties. Due to the
large number of vehicles involved, however, the certificate of
title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually
is not amended to reflect the assignment of the seller's security
interest for the benefit of the holders of the Automobile
Receivable Securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle
owner the right to assert against the holder of the owner's
Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the Automobile Receivable
Securities.
Credit Card Receivable Securities. The Fund may invest in
Asset Backed Securities backed by receivables from revolving
credit card agreements ("Credit Card Receivable Securities").
Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile
Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order
to lengthen the maturity of Credit Card Receivable Securities,
most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through
to the security holder and principal payments received on such
Accounts are used to fund the transfer to the pool of assets
supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial
PAGE 21
fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the
quality of the assets backing the security, such as the
imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during
the initial period and the non-occurrence of specified events.
An acceleration in cardholders' payment rates or any other event
which shortens the period during which additional credit card
charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could
shorten the weighted average life and yield of the Credit Card
Receivable Security.
Credit cardholders are entitled to the protection of a
number of state and federal consumer credit laws, many of which
give such holder the right to set off certain amounts against
balances owed on the credit card, thereby reducing amounts paid
on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. T. Rowe Price anticipates that Asset Backed
Securities backed by assets other than those described above will
be issued in the future. The Fund may invest in such securities
in the future if such investment is otherwise consistent with its
investment objective and policies.
There are, of course, other types of securities that are, or
may become available, which are similar to the foregoing and the
Fund reserves the right to invest in these securities.
PORTFOLIO MANAGEMENT PRACTICES
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional
investors or other persons, pursuant to agreements requiring that
the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash,
U.S. government securities, letters of credit or such other
collateral as may be permitted under its investment program.
While the securities are being lent, the Fund will continue to
receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment
PAGE 22
of the collateral or a fee from the borrower. The Fund has a
right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading
on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and
sales of such securities in such foreign markets. The Fund will
not have the right to vote securities while they are being lent,
but it will call a loan in anticipation of any important vote.
The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
deemed by T. Rowe Price to be of good standing and will not be
made unless, in the judgment of T. Rowe Price, the consideration
to be earned from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange
Commission and certain state regulatory agencies, the Fund may
make loans to, or borrow funds from, other mutual funds sponsored
or advised by T. Rowe Price or Price-Fleming (collectively,
"Price Funds"). The Fund has no current intention of engaging in
these practices at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which
an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer
or a bank that is a member of the Federal Reserve System. Any
such dealer or bank will be on T. Rowe Price's approved list and
have a credit rating with respect to its short-term debt of at
least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe
Price. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus
specified interest. Repurchase agreements are generally for a
short period of time, often less than a week. Repurchase
agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Fund will only enter
into repurchase agreements where (i) the underlying securities
are of the type (excluding maturity limitations) which the Fund's
investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest
PAGE 23
accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-
entry transfer to the account of the custodian or a bank acting
as agent. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack
of access to income during this period; and (c) expenses of
enforcing its rights.
Reverse Repurchase Agreements
Although the Fund has no current intention, in the
foreseeable future, of engaging in reverse repurchase agreements,
the Fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Fund is
the seller of, rather than the investor in, securities, and
agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of the securities because it avoids
certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund,
subject to Investment Restriction (1). (See "Investment
Restrictions," page 32.)
All Funds, Except Equity Index Fund
Options
Writing Covered Call Options
The Fund may write (sell) American or European style
"covered" call options and purchase options to close out options
previously written by a Fund. In writing covered call options,
the Fund expects to generate additional premium income which
should serve to enhance the Fund's total return and reduce the
effect of any price decline of the security or currency involved
in the option. Covered call options will generally be written on
securities or currencies which, in T. Rowe Price's opinion, are
not expected to have any major price increases or moves in the
near future but which, over the long term, are deemed to be
attractive investments for the Fund.
PAGE 24
A call option gives the holder (buyer) the "right to
purchase" a security or currency at a specified price (the
exercise price) at expiration of the option (European style) or
at any time until a certain date (the expiration date) (American
style). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to
deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the
writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the
case of a call option, a writer is required to deposit in escrow
the underlying security or currency or other assets in accordance
with the rules of a clearing corporation.
The Fund will write only covered call options. This means
that the Fund will own the security or currency subject to the
option or an option to purchase the same underlying security or
currency, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to the
fluctuating market value of the optioned securities or
currencies.
Portfolio securities or currencies on which call options may
be written will be purchased solely on the basis of investment
considerations consistent with the Fund's investment objective.
The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast
to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When
writing a covered call option, a Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the
underlying security or currency above the exercise price, but
conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or
currencies not subject to an option, the Fund has no control over
when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any
time prior to the expiration of its obligation as a writer. If a
call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying
PAGE 25
security or currency during the option period. If the call
option is exercised, the Fund will realize a gain or loss from
the sale of the underlying security or currency. The Fund does
not consider a security or currency covered by a call to be
"pledged" as that term is used in the Fund's policy which limits
the pledging or mortgaging of its assets.
The premium received is the market value of an option. The
premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of
the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made,
T. Rowe Price, in determining whether a particular call option
should be written on a particular security or currency, will
consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those
options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This
liability will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (close of
the New York Stock Exchange), or, in the absence of such sale,
the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or
currency upon the exercise of the option.
Closing transactions will be effected in order to realize a
profit on an outstanding call option, to prevent an underlying
security or currency from being called, or, to permit the sale of
the underlying security or currency. Furthermore, effecting a
closing transaction will permit the Fund to write another call
option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund
desires to sell a particular security or currency from its
portfolio on which it has written a call option, or purchased a
put option, it will seek to effect a closing transaction prior
to, or concurrently with, the sale of the security or currency.
There is, of course, no assurance that the Fund will be able to
effect such closing transactions at favorable prices. If the
Fund cannot enter into such a transaction, it may be required to
hold a security or currency that it might otherwise have sold.
When the Fund writes a covered call option, it runs the risk of
not being able to participate in the appreciation of the
underlying securities or currencies above the exercise price, as
PAGE 26
well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in
higher transaction costs. The Fund will pay transaction costs in
connection with the writing of options to close out previously
written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency
for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional costs may
be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more than the premium received from the writing of the option.
Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the
Fund.
In order to comply with the requirements of several states,
the Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market
value of the Fund's net assets. Should these state laws change
or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. In calculating
the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and
puts on identical securities or currencies with identical
maturity dates.
Writing Covered Put Options
The Fund may write American or European style covered put
options and purchase options to close out options previously
written by the Fund. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the
PAGE 27
exercise price during the option period (American style) or at
the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against
delivery of the underlying security or currency. The operation
of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis,
which means that the Fund would maintain in a segregated account
cash, U.S. government securities or other liquid high-grade debt
obligations in an amount not less than the exercise price or the
Fund will own an option to sell the underlying security or
currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all
times while the put option is outstanding. (The rules of a
clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in
circumstances where T. Rowe Price wishes to purchase the
underlying security or currency for the Fund's portfolio at a
price lower than the current market price of the security or
currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the
Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this
technique could be used to enhance current return during periods
of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency
would decline below the exercise price less the premiums
received. Such a decline could be substantial and result in a
significant loss to the Fund. In addition, the Fund, because it
does not own the specific securities or currencies which it may
be required to purchase in exercise of the put, cannot benefit
from appreciation, if any, with respect to such specific
securities or currencies.
In order to comply with the requirements of several states,
the Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies
covering put or call options exceeds 25% of the market value of
the Fund's net assets. Should these state laws change or should
the Fund obtain a waiver of its application, the Fund reserves
the right to increase this percentage. In calculating the 25%
PAGE 28
limit, the Fund will offset, against the value of assets covering
written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put
options. As the holder of a put option, the Fund has the right
to sell the underlying security or currency at the exercise price
at any time during the option period (American style) or at the
expiration of the option (European style). The Fund may enter
into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase
put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies.
An example of such use of put options is provided below.
The Fund may purchase a put option on an underlying security
or currency (a "protective put") owned by the Fund as a defensive
technique in order to protect against an anticipated decline in
the value of the security or currency. Such hedge protection is
provided only during the life of the put option when the Fund, as
the holder of the put option, is able to sell the underlying
security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's
exchange value. For example, a put option may be purchased in
order to protect unrealized appreciation of a security or
currency where T. Rowe Price deems it desirable to continue to
hold the security or currency because of tax considerations. The
premium paid for the put option and any transaction costs would
reduce any capital gain otherwise available for distribution when
the security or currency is eventually sold.
The Fund may also purchase put options at a time when the
Fund does not own the underlying security or currency. By
purchasing put options on a security or currency it does not own,
the Fund seeks to benefit from a decline in the market price of
the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than
the exercise price during the life of the put option, the Fund
will lose its entire investment in the put option. In order for
the purchase of a put option to be profitable, the market price
of the underlying security or currency must decline sufficiently
below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale
transaction.
PAGE 29
To the extent required by the laws of certain states, the
Fund may not be permitted to commit more than 5% of its assets to
premiums when purchasing put and call options. Should these
state laws change or should the Fund obtain a waiver of its
application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The premium paid
by the Fund when purchasing a put option will be recorded as an
asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale
price at the time at which the net asset value per share of the
Fund is computed (close of New York Stock Exchange), or, in the
absence of such sale, the latest bid price. This asset will be
terminated upon expiration of the option, the selling (writing)
of an identical option in a closing transaction, or the delivery
of the underlying security or currency upon the exercise of the
option.
Purchasing Call Options
The Fund may purchase American or European style call
options. As the holder of a call option, the Fund has the right
to purchase the underlying security or currency at the exercise
price at any time during the option period (American style) or at
the expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may
purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its
current return. The Fund may also purchase call options in order
to acquire the underlying securities or currencies. Examples of
such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of
acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call
options enables the Fund to acquire the securities or currencies
at the exercise price of the call option plus the premium paid.
At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities
or currencies directly. This technique may also be useful to the
Fund in purchasing a large block of securities or currencies that
would be more difficult to acquire by direct market purchases.
So long as it holds such a call option rather than the underlying
security or currency itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying
security or currency and in such event could allow the call
PAGE 30
option to expire, incurring a loss only to the extent of the
premium paid for the option.
To the extent required by the laws of certain states, the
Fund may not be permitted to commit more than 5% of its assets to
premiums when purchasing call and put options. Should these
state laws change or should the Fund obtain a waiver of its
application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it
owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for
this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call
options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While
the Fund would look to a clearing corporation to exercise
exchange-traded options, if the Fund were to purchase a dealer
option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the
dealer to do so would result in the loss of the premium paid by
the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid
market while dealer options have none. Consequently, the Fund
will generally be able to realize the value of a dealer option it
has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when the Fund writes a dealer option,
it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option.
While the Fund will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of
entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a
closing purchase transaction, it will not be able to liquidate
securities (or other assets) or currencies used as cover until
the option expires or is exercised. In the event of insolvency
of the contra party, the Fund may be unable to liquidate a dealer
option. With respect to options written by the Fund, the
PAGE 31
inability to enter into a closing transaction may result in
material losses to the Fund. For example, since the Fund must
maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the
option. This requirement may impair a Fund's ability to sell
portfolio securities or currencies at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased
dealer options and the assets used to secure the written dealer
options are illiquid securities. The Fund may treat the cover
used for written OTC options as liquid if the dealer agrees that
the Fund may repurchase the OTC option it has written for a
maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds
the intrinsic value of the option. Accordingly, the Fund will
treat dealer options as subject to the Fund's limitation on
illiquid securities. If the SEC changes its position on the
liquidity of dealer options, the Fund will change its treatment
of such instrument accordingly.
Equity Index Fund
The only option activity the Fund currently may engage in is
the purchase of S&P 500 call options. Such activity is subject
to the same risks described above under "Purchasing Call
Options". The Fund reserves the right to engage in other options
activity, however.
All Funds
Futures Contracts
Transactions in Futures
The Fund may enter into futures contracts, including stock
index, interest rate and currency futures ("futures or futures
contracts"). The New Era Fund may also enter into futures on
commodities related to the types of companies in which it
invests, such as oil and gold futures. The Equity Index Fund may
only enter into stock index futures, such as the S&P 500 stock
index, to provide an efficient means of maintaining liquidity
while being invested in the market, to facilitate trading or to
reduce transaction costs. It will not use futures for hedging
purposes. Otherwise the nature of such futures and the
PAGE 32
regulatory limitations and risks to which they are subject are
the same as those described below.
Stock index futures contracts may be used to provide a hedge
for a portion of the Fund's portfolio, as a cash management tool,
or as an efficient way for T. Rowe Price to implement either an
increase or decrease in portfolio market exposure in response to
changing market conditions. The Fund may purchase or sell
futures contracts with respect to any stock index. Nevertheless,
to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose
movements will have a significant correlation with movements in
the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a
hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the
effective return on securities or currencies held or intended to
be acquired by the Fund. In this regard, the Fund could sell
interest rate or currency futures as an offset against the effect
of expected increases in interest rates or currency exchange
rates and purchase such futures as an offset against the effect
of expected declines in interest rates or currency exchange
rates.
The Fund will enter into futures contracts which are traded
on national or foreign futures exchanges, and are standardized as
to maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the CFTC. Futures are traded in
London, at the London International Financial Futures Exchange,
in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase
of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low
cost means of implementing the Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.
The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
PAGE 33
qualify as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded
on a commodities exchange will be considered "related options".
This policy may be modified by the Board of Directors/Trustees
without a shareholder vote and does not limit the percentage of
the Fund's assets at risk to 5%.
In accordance with the rules of the State of California, the
Fund may have to apply the above 5% test without excluding the
value of initial margin and premiums paid for bona fide hedging
positions.
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the
position, or alternative cover (such as owning an offsetting
position) will be employed. Assets used as cover or held in an
identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or identified accounts could
impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund
would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a stock index) for a
specified price, date, time and place designated at the time the
contract is made. Brokerage fees are incurred when a futures
PAGE 34
contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred
to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.
Unlike when the Fund purchases or sells a security, no price
would be paid or received by the Fund upon the purchase or sale
of a futures contract. Upon entering into a futures contract,
and to maintain the Fund's open positions in futures contracts,
the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of
cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as
"initial margin." The margin required for a particular futures
contract is set by the exchange on which the contract is traded,
and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are
customarily purchased and sold on margins that may range upward
from less than 5% of the value of the contract being traded.
If the price of an open futures contract changes (by
increase in the case of a sale or by decrease in the case of a
purchase) so that the loss on the futures contract reaches a
point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of
favorable price changes in the futures contract so that the
margin deposit exceeds the required margin, the broker will pay
the excess to the Fund.
These subsequent payments, called "variation margin," to and
from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuate making the long and short
positions in the futures contract more or less valuable, a
process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require
actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures
contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for
the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is
PAGE 35
more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations.
There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is
composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of
those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500
Index were $150, one contract would be worth $75,000 (500 units x
$150). The stock index futures contract specifies that no
delivery of the actual stock making up the index will take place.
Instead, settlement in cash occurs. Over the life of the
contract, the gain or loss realized by the Fund will equal the
difference between the purchase (or sale) price of the contract
and the price at which the contract is terminated. For example,
if the Fund enters into a futures contract to buy 500 units of
the S&P 500 Index at a specified future date at a contract price
of $150 and the S&P 500 Index is at $154 on that future date, the
Fund will gain $2,000 (500 units x gain of $4). If the Fund
enters into a futures contract to sell 500 units of the stock
index at a specified future date at a contract price of $150 and
the S&P 500 Index is at $152 on that future date, the Fund will
lose $1,000 (500 units x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts
are volatile and are influenced, among other things, by actual
and anticipated changes in the market and interest rates, which
in turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading
PAGE 36
session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a futures contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long futures
positions or short futures positions. The Fund may close its
positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures contracts
PAGE 37
only on exchanges or boards of trade where there appears to be an
active market, there is no assurance that a liquid market on an
exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible
to close a futures contract, and in the event of adverse price
movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures
contracts have been used to hedge the underlying instruments, the
Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In
such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses
on the futures contract. However, as described below, there is
no guarantee that the price of the underlying instruments will,
in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures
contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of unexpected market
behavior, market or interest rate trends. There are several
risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures
contracts and movements in the prices of the underlying
instruments which are the subject of the hedge. T. Rowe Price
will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the
Fund's underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging
purposes is also subject to T. Rowe Price's ability to correctly
predict movements in the direction of the market. It is possible
that, when the Fund has sold futures to hedge its portfolio
against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the
futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a
certain degree, T. Rowe Price believes that over time the value
of the Fund's portfolio will tend to move in the same direction
as the market indices used to hedge the portfolio. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
PAGE 38
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash,
it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close
futures contracts through offsetting transactions, which could
distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements
in the securities markets, and as a result the futures market
might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market
might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by T.
Rowe Price might not result in a successful hedging transaction
over a very short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of
futures in which it may invest.
Options on futures are similar to options on underlying
instruments except that options on futures give the purchaser the
right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at
PAGE 39
any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by the
delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds (in the case
of a call) or is less than (in the case of a put) the exercise
price of the option on the futures contract. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put
options on stock index futures, the Fund may write or purchase
call and put options on stock indices. Such options would be
used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of
the Fund and other T. Rowe Price Funds. Such aggregated orders
would be allocated among the Funds and the other T. Rowe Price
Funds in a fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instrument or contract
and having the same exercise price and expiration date, its
ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to
PAGE 40
exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by
an exchange of special procedures which may interfere with the
timely execution of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in
futures or options transactions other than those described above,
it reserves the right to do so. Such futures and options trading
might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the
National Futures Association nor any domestic exchange regulates
activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of
trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a
position taken on the market may be liquidated by a transaction
on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or
foreign options transaction occurs. For these reasons, when the
Fund trades foreign futures or foreign options contracts, it may
not be afforded certain of the protective measures provided by
the Commodity Exchange Act, the CFTC's regulations and the rules
of the National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In
particular, funds received from the Fund for foreign futures or
foreign options transactions may not be provided the same
protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore, the
PAGE 41
potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time the Fund's order is
placed and the time it is liquidated, offset or exercised.
All Funds, Except Equity Index Fund
Foreign Currency Transactions
A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the
interbank market conducted directly between currency traders
(usually large, commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions
are charged at any stage for trades.
The Fund may enter into forward contracts for a variety of
purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:
First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency
involved in the underlying security transactions, the Fund will
be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.
Second, when T. Rowe Price believes that one currency may
experience a substantial movement against another currency,
including the U.S. dollar, it may enter into a forward contract
to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Fund
may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities
PAGE 42
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into
separate forward contracts for each currency held in the Fund.
The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered
into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly
uncertain. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the
longer term investment decisions made with regard to overall
diversification strategies. However, T. Rowe Price believes that
it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of
the Fund will be served.
The Fund may enter into forward contacts for any other
purpose consistent with the Fund's investment objective and
program. However, the Fund will not enter into a forward
contract, or maintain exposure to any such contract(s), if the
amount of foreign currency required to be delivered thereunder
would exceed the Fund's holdings of liquid, high-grade debt
securities and currency available for cover of the forward
contract(s). In determining the amount to be delivered under a
contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the
portfolio security and make delivery of the foreign currency, or
it may retain the security and either extend the maturity of the
forward contract (by "rolling" that contract forward) or may
initiate a new forward contract.
If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss (as
described below) to the extent that there has been movement in
forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices
decline during the period between the Fund's entering into a
forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices
PAGE 43
increase, the Fund will suffer a loss to the extent of the price
of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange
contracts will generally be limited to the transactions described
above. However, the Fund reserves the right to enter into
forward foreign currency contracts for different purposes and
under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless
deemed appropriate by T. Rowe Price. It also should be realized
that this method of hedging against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange at a
future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any
potential gain which might result from an increase in the value
of that currency.
Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so
from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Fund at one
rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts
The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on
currencies, which will be treated as Section 1256 contracts or
straddles.
Transactions which are considered Section 1256 contracts
will be considered to have been closed at the end of the Fund's
fiscal year and any gains or losses will be recognized for tax
purposes at that time. Such gains or losses from the normal
closing or settlement of such transactions will be characterized
PAGE 44
as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument.
The Fund will be required to distribute net gains on such
transactions to shareholders even though it may not have closed
the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts,
including options and futures on currencies, which offset a
foreign dollar denominated bond or currency position may be
considered straddles for tax purposes, in which case a loss on
any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding
period of the securities or currencies comprising the straddle
will be deemed not to begin until the straddle is terminated.
For securities offsetting a purchased put, this adjustment of the
holding period may increase the gain from sales of securities
held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an
equity security will not include the period of time the option is
outstanding.
Losses on written covered calls and purchased puts on
securities, excluding certain "qualified covered call" options on
equity securities, may be long-term capital loss, if the security
covering the option was held for more than twelve months prior to
the writing of the option.
In order for the Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward
exchange contracts on currencies is qualifying income for
purposes of the 90% requirement. In addition, gains realized on
the sale or other disposition of securities, including option,
futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Fund's
annual gross income. In order to avoid realizing excessive gains
on securities or currencies held less than three months, the Fund
may be required to defer the closing out of option, futures or
foreign forward exchange contracts) beyond the time when it would
otherwise be advantageous to do so. It is anticipated that
unrealized gains on Section 1256 option, futures and foreign
forward exchange contracts, which have been open for less than
PAGE 45
three months as of the end of the Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes
of the 30% test.
INVESTMENT RESTRICTIONS
Fundamental policies may not be changed without the approval
of the lesser of (1) 67% of the Fund's shares present at a
meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (2) more
than 50% of the Fund's outstanding shares. Other restrictions in
the form of operating policies are subject to change by the
Fund's Board of Directors/Trustees without shareholder approval.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after,
and is caused by, an acquisition of securities or assets of, or
borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may
(i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments
or engage in other transactions, which may involve
a borrowing, in a manner consistent with the
Fund's investment objective and program, provided
that the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Fund's total
assets (including the amount borrowed) less
liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in
accordance with applicable law. The Fund may
borrow from banks, other Price Funds or other
persons to the extent permitted by applicable law;
(2) Commodities. Purchase or sell physical
commodities; except that it may enter into futures
contracts and options thereon;
PAGE 46
(3) Industry Concentration. Purchase the securities
of any issuer if, as a result, more than 25% of
the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same
industry;
(4) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an
interfund lending program with other Price Funds
provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed
33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt
securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer
(All Funds except Capital Opportunity). Purchase
a security if, as a result, with respect to 75% of
the value of its total assets, more than 5% of the
value of the Fund's total assets would be invested
in the securities of a single issuer, except
securities issued or guaranteed by the U.S.
Government or any of its agencies or
instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer
(All Funds except Capital Opportunity). Purchase
a security if, as a result, with respect to 75% of
the value of the Fund's total assets, more than
10% of the outstanding voting securities of any
issuer would be held by the Fund (other than
obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities);
(7) Real Estate. Purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prevent the
Fund from investing in securities or other
instruments backed by real estate or in securities
of companies engaged in the real estate business);
(8) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940; or
PAGE 47
(9) Underwriting. Underwrite securities issued by
other persons, except to the extent that the Fund
may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in
connection with the purchase and sale of its
portfolio securities in the ordinary course of
pursuing its investment program.
NOTES
The following notes should be read in connection with
the above-described fundamental policies. The notes are
not fundamental policies.
With respect to investment restrictions (1) and (4), the
Fund will not borrow from or lend to any other Price
Fund unless each Fund applies for and receives an
exemptive order from the SEC or the SEC issues rules
permitting such transactions. The Fund has no current
intention of engaging in any such activity and there is
no assurance the SEC would grant any order requested by
the Fund or promulgate any rules allowing the
transactions.
With respect to investment restriction (2), the Fund
does not consider currency contracts or hybrid
investments to be commodities.
For purposes of investment restriction (3), U.S., state
or local governments, or related agencies or
instrumentalities, are not considered an industry.
Industries are determined by reference to the
classifications of industries set forth in the Fund's
semi-annual and annual reports.
For purposes of investment restriction (4), the Fund
will consider the acquisition of a debt security to
include the execution of a note or other evidence of an
extension of credit with a term of more than nine
months.
Operating Policies
As a matter of operating policy, the Fund may not:
PAGE 48
(1) Borrowing. The Fund will not purchase additional
securities when money borrowed exceeds 5% of its
total assets;
(2) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management
or control;
(3) Futures Contracts. Purchase a futures contract or
an option thereon if, with respect to positions in
futures or options on futures which do not
represent bona fide hedging, the aggregate initial
margin and premiums on such options would exceed
5% of the Fund's net asset value;
(4) Illiquid Securities. Purchase illiquid securities
and securities of unseasoned issuers if, as a
result, more than 15% of its net assets would be
invested in such securities, provided that the
Fund will not invest more than 10% of its total
assets in restricted securities and not more than
5% in securities of unseasoned issuers.
Securities eligible for resale under Rule 144A of
the Securities Act of 1933 are not included in the
10% limitation but are subject to the 15%
limitation;
(5) Investment Companies. Purchase securities of
open-end or closed-end investment companies except
in compliance with the Investment Company Act of
1940 and applicable state law. Duplicate fees may
result from such purchases;
(6) Margin. Purchase securities on margin, except (i)
for use of short-term credit necessary for
clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection
with futures contracts or other permissible
investments;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in
any manner, transfer any security owned by the
Fund as security for indebtedness except as may be
necessary in connection with permissible
borrowings or investments and then such
mortgaging, pledging or hypothecating may not
PAGE 49
exceed 33 1/3% of the Fund's total assets at the
time of borrowing or investment;
(8) Oil and Gas Programs. Purchase participations or
other direct interests in or enter into leases
with respect to, oil, gas, or other mineral
exploration or development programs;
(9) Options, Etc. Invest in puts, calls, straddles,
spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement
of Additional Information;
(10) Ownership of Portfolio Securities by Officers and
Directors/Trustees. Purchase or retain the
securities of any issuer if those officers and
directors of the Fund, and of its investment
manager, who each owns beneficially more than .5%
of the outstanding securities of such issuer,
together own beneficially more than 5% of such
securities;
(11) Short Sales. Effect short sales of securities;
(12) Unseasoned Issuers. Purchase a security (other
than obligations issued or guaranteed by the U.S.,
any foreign, state or local government, their
agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's total
assets would be invested in the securities of
issuers which at the time of purchase had been in
operation for less than three years (for this
purpose, the period of operation of any issuer
shall include the period of operation of any
predecessor or unconditional guarantor of such
issuer). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or
(13) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the net
assets of the Fund would be invested in warrants
which are not listed on the New York Stock
Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of
the value of the net assets of the Fund would be
invested in warrants whether or not so listed.
PAGE 50
For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or
market and warrants acquired by the Fund in units
or attached to securities may be deemed to be
without value.
Blue Chip Growth, Capital Opportunity, and Value Funds
Notwithstanding anything in the above fundamental and
operating restrictions to the contrary, the Fund may invest all
of its assets in a single investment company or a series thereof
in connection with a "master-feeder" arrangement. Such an
investment would be made where the Fund (a "Feeder"), and one or
more other Funds with the same investment objective and program
as the Fund, sought to accomplish its investment objective and
program by investing all of its assets in the shares of another
investment company (the "Master"). The Master would, in turn,
have the same investment objective and program as the Fund. The
Fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of
Feeder funds. In the event that the Fund exercises its right to
convert to a Master Fund/Feeder Fund structure, it will do so in
compliance with the Guidelines for Registration of a Master
Fund/Feeder Fund as established by the North American Securities
Administrators Association, Inc. ("NASAA").
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below.
Unless otherwise noted, the address of each is 100 East Pratt
Street, Baltimore, Maryland 21202. Except as indicated, each has
been an employee of T. Rowe Price for more than five years. In
the list below, the Fund's directors who are considered
"interested persons" of T. Rowe Price as defined under
Section 2(a)(19) of the Investment Company Act of 1940 are noted
with an asterisk (*). These directors are referred to as inside
directors by virtue of their officership, directorship, and/or
employment with T. Rowe Price.
All Funds
Independent Directors/Trustees
LEO C. BAILEY, Retired; Address: 3396 South Placita Fabula, Green
Valley, Arizona 85614
PAGE 51
DONALD W. DICK, JR., Principal, Overseas Partners, Inc., a
financial investment firm; Director, Waverly Press, Inc.,
Baltimore, Maryland; Address: 375 Park Avenue, Suite 2201, New
York, New York 10152
DAVID K. FAGIN, Chairman, Chief Executive Officer and Director,
Golden Star Resources, Ltd.; formerly (1986-7/91) President,
Chief Operating Officer and Director, Homestake Mining Company;
Address: One Norwest Center, 1700 Lincoln Street, Suite 1950,
Denver, Colorado 80203
ADDISON LANIER, Financial management; President and Director,
Thomas Emery's Sons, Inc., and Emery Group, Inc.; Director,
Scinet Development and Holdings, Inc.; Address: 441 Vine Street,
#2310, Cincinnati, Ohio 45202-2913
JOHN K. MAJOR, Chairman of the Board and President, KCMA
Incorporated, Tulsa, Oklahoma; Address: 126 E. 26 Place, Tulsa,
Oklahoma 74114-2422
HANNE M. MERRIMAN, Retail business consultant; formerly,
President and Chief Operating Officer, Nan Duskin, Inc., a
women's specialty store, Director and Chairman Federal Reserve
Bank of Richmond, and President and Chief Executive Officer,
Honeybee, Inc., a division of Spiegel, Inc; Director, Ann Taylor
Stores Corporation, Central Illinois Public Service Company,
CIPSCO Incorporated, The Rouse Company, State Farm Mutual
Automobile Insurance Company and USAir Group, Inc., Member,
National Women's Forum; Trustee, American-Scandinavian
Foundation; Address: One James Center, 901 East Cary Street,
Richmond, Virginia 23219-4030
HUBERT D. VOS, President, Stonington Capital Corporation, a
private investment company; Address: 1231 State Street, Suite
210, Santa Barbara, CA 93190-0409
PAUL M. WYTHES, Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership providing equity capital to
young high technology companies throughout the United States;
Director, Teltone Corporation, Interventional Technologies Inc.,
and Stuart Medical, Inc.; Address: 755 Page Mill Road, Suite
A200, Palo Alto, California 94304
Officers
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe
Price; Vice President and Director, T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price
Trust Company; Vice President, Rowe Price-Fleming International,
Inc. and T. Rowe Price Retirement Plan Services, Inc.
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
PAGE 52
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
Balanced Fund
*JAMES S. RIEPE, Chairman of the Board--Managing Director, T.
Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc.,
and T. Rowe Price Retirement Plan Services, Inc.; President and
Director, T. Rowe Price Investment Services, Inc; President and
Trust Officer, T. Rowe Price Trust Company; Director, Rowe Price-
Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Managing Director
of T. Rowe Price; Chairman of the Board, Rowe Price-Fleming
International, Inc.; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
RICHARD T. WHITNEY, President--Vice President of T. Rowe Price
and T. Rowe Price Trust Company
STEPHEN W. BOESEL, Vice President--Managing Director, T. Rowe
Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
JONATHAN M. GREENE, Vice President--Vice President of T. Rowe
Price and T. Rowe Price Trust Company
JAMES A.C. KENNEDY, III, Vice President--Managing Director of T.
Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company
DONALD J. PETERS, Vice President--Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price;
Vice President of Rowe Price-Fleming International, Inc. and T.
Rowe Price Trust Company
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
Blue Chip Growth Fund
*THOMAS H. BROADUS, JR., President and Director--Managing
Director, T. Rowe Price; Chartered Financial Analyst and
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
PAGE 53
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director, T. Rowe Price;
Chairman of the Board, Rowe Price-Fleming International, Inc.;
Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
STEPHANIE C. CLANCY, Assistant Vice President--Employee, T. Rowe
Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
Capital Appreciation Fund
*GEORGE J. COLLINS, Chairman of the Board--President, Chief
Executive Officer and Managing Director, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Retirement
Plan Services, Inc. and T. Rowe Price Trust Company; Chartered
Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*GEORGE A. ROCHE, Director--Managing Director and Chief Financial
Officer, T. Rowe Price; Vice President and Director, Rowe
Price-Fleming International, Inc.
RICHARD P. HOWARD, President--Vice President of T. Rowe Price;
Chartered Financial Analyst
ARTHUR B. CECIL, III, Vice President--Vice President of T. Rowe
Price
CHARLES A. MORRIS, Vice President--Vice President of T. Rowe
Price
DAVID A. REA, Vice President--Vice President, T. Rowe Price
ALAN R. STUART, Vice President--Vice President of T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
Capital Opportunity Fund
*JOHN H. LAPORTE, JR., President and Director--Managing Director,
T. Rowe Price; Chartered Financial Analyst
JOHN F. WAKEMAN, Executive Vice President--Vice President, T.
Rowe Price
PAGE 54
BRENT W. CLUM, Vice President--Vice President, T. Rowe Price
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
DAVID J. WALLACK, Vice President--Vice President; formerly (9/88-
7/90) Citibank, Private Banking Group
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price; Assistant Vice President, T. Rowe Price
Investment Services, Inc.
JOSEPH A. CRUMBLING, Assistant Vice President
Dividend Growth Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director of T. Rowe Price;
Chairman of the Board, Rowe Price-Fleming International, Inc.;
Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
WILLIAM J. STROMBERG, Executive Vice President--Vice President,
T. Rowe Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
ALAN R. STUART, Vice President--Vice President, T. Rowe Price
DAVID J. WALLACK, Vice President--Vice President; formerly (9/88-
7/90) Citibank, Private Banking Group
STEPHANIE C. CLANCY, Assistant Vice President--Employee, T. Rowe
Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
Equity Income Fund
*THOMAS H. BROADUS, JR., Vice President and Trustee--Managing
Director, T. Rowe Price; Chartered Financial Analyst and
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
PAGE 55
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Trustee--Managing Director of T. Rowe Price;
Chairman of the Board, Rowe Price-Fleming International, Inc.;
Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
DENISE S. JEVNE, Vice President--Vice President, T. Rowe Price
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc., Boston, Massachusetts
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
Growth & Income Fund
*STEPHEN W. BOESEL, President and Director--Vice President, T.
Rowe Price
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director of T. Rowe Price;
Chairman of the Board, Rowe Price-Fleming International, Inc.;
Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
ARTHUR B. CECIL, III, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
BRENT W. CLUM, Vice President--Vice President, T. Rowe Price
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe
Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
PAGE 56
Growth Stock Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Chairman of the Board--Managing Director of T.
Rowe Price; Chairman of the Board, Rowe Price-Fleming
International, Inc.; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
JOHN D. GILLESPIE, President--Vice President, T. Rowe Price
CARTER O. HOFFMAN, Vice President--Managing Director, T. Rowe
Price; Chartered Investment Counselor
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price
JAMES A.C. KENNEDY, Vice President--Managing Director, T. Rowe
Price
DENISE S. JEVNE, Vice President--Vice President, T. Rowe Price
BRIAN C. ROGERS, Vice President--Managing Director, T. Rowe Price
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc.; Boston, Massachusetts
ALAN R. STUART, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
Equity Index Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director of T. Rowe Price;
Chairman of the Board, Rowe Price-Fleming International, Inc.;
Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
RICHARD T. WHITNEY, President--Vice President, T. Rowe Price
KRISTEN D. FARROW, Vice President--Assistant Vice President, T.
Rowe Price
JONATHAN M. GREENE, Vice President--Vice President, T. Rowe Price
ALAN R. STUART, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
PAGE 57
Mid-Cap Growth Fund
*JOHN H. LAPORTE, JR., Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst
*JAMES A. C. KENNEDY, III, Director--Managing Director, T. Rowe
Price
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
BRIAN W. H. BERGHUIS, Executive Vice President--Vice President,
T. Rowe Price
BRENT W. CLUM, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
JOSEPH KLEIN, III, Vice President--Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
New America Growth Fund
*JOHN H. LAPORTE, JR., President and Trustee--Managing Director
of T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
BRIAN W. H. BERGHUIS, Executive Vice President--Vice President,
T. Rowe Price
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
JOHN WAKEMAN, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
New Era Fund
*GEORGE J. COLLINS, Director--President, Managing Director, and
Chief Executive Officer, T. Rowe Price; Director, Rowe
Price-Fleming International, Inc., T. Rowe Price Trust Company,
and T. Rowe Price Retirement Plan Services, Inc.; Chartered
Investment Counselor
PAGE 58
*CARTER O. HOFFMAN, Director--Managing Director, T. Rowe Price;
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*GEORGE A. ROCHE, President and Director--Managing Director and
Chief Financial Officer, T. Rowe Price; Vice President and
Director, Rowe Price-Fleming International, Inc.
STEPHEN W. BOESEL, Vice President--Vice President, T. Rowe Price
HUGH M. EVANS, III, Vice President--Employee, T. Rowe Price;
formerly (7/1/88-7/1/90) Analyst, Morgan Stanley & Co., Inc., New
York, New York
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
JAMES A.C. KENNEDY, III, Vice President--Managing Director, T.
Rowe Price
CHARLES M. OBER, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
DAVID L. REA, Vice President--Vice President, T. Rowe Price
ALAN R. STUART, Vice President--Vice President, T. Rowe Price
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price;
formerly (9/89-7/90) Citibank, Private Banking Group
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
New Horizons Fund
*JOHN H. LAPORTE, President and Director--Managing Director of T.
Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director of T. Rowe Price;
Chairman of the Board, Rowe Price-Fleming International, Inc.;
Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
PRESTON G. ATHEY, Vice President--Vice President of T. Rowe Price
BRIAN W. H. BERGHUIS, Vice President--Vice President of T. Rowe
Price
LISE J. BUYER, Vice President--Vice President, T. Rowe Price;
formerly (4/91-4/92) PC Analyst, Cowen & Co., (2/90-4/92) PC
PAGE 59
Analyst, Needham & Co., and (2/87-1/90) Analyst, Prudential Bache
Securities
BRENT W. CLUM, Vice President--Vice President, T. Rowe Price
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
DENISE E. JEVNE, Vice President--Vice President, T. Rowe Price
JOSEPH KLEIN, III, Vice President--Vice President, T. Rowe Price
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc., Boston, Massachusetts
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
OTC Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director
of T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
GREGORY A. McCRICKARD, President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
JAMES A. C. KENNEDY, III, Vice President--Managing Director of T.
Rowe Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
Science & Technology Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director,
T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
PAGE 60
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
CHARLES A. MORRIS, President--Vice President, T. Rowe Price
LISE J. BUYER, Vice President--Vice President, T. Rowe Price;
formerly (4/91-4/92) PC Analyst, Cowen & Co., (2/90-4/92) PC
Analyst, Needham & Co., and (2/87-1/90) Analyst, Prudential Bache
Securities
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
JOSEPH KLEIN, III, Vice President--Vice President, T. Rowe Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
Small-Cap Value Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director
of T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*GEORGE A. ROCHE, Director--Managing Director and Chief Financial
Officer, T. Rowe Price; Vice President and Director, Rowe
Price-Fleming International, Inc.
PRESTON G. ATHEY, President--Vice President, T. Rowe Price
HUGH M. EVANS, III, Vice President--Employee, T. Rowe Price;
formerly (7/1/88-7/1/90) Analyst, Morgan Stanley & Co., Inc., New
York, New York
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
JONATHAN M. GREENE, Vice President--Vice President of T. Rowe
Price and T. Rowe Price Trust Company
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe
Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company; Chartered Financial Analyst
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International, Inc.
PAGE 61
Value Fund
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc.; President
and Director, T. Rowe Price Investment Services, Inc; President
and Trust Officer, T. Rowe Price Trust Company; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Managing Director
of T. Rowe Price; Chairman of the Board, Rowe Price-Fleming
International, Inc.; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
STEPHEN W. BOESEL, Vice President--Vice President, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
JOSEPH KLEIN, III, Vice President--Vice President, T. Rowe Price
NATHANIEL S. LEVY, Vice President--Vice President, T. Rowe Price
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc., Boston, Massachusetts
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price;
formerly (9/89-7/90) Citibank, Private Banking Group
JOSEPH A. CRUMBLING, Assistant Vice President
The Fund's Executive Committee, consisting of the Fund's
interested directors/trustees, has been authorized by its
respective Board of Directors/Trustees to exercise all powers of
the Board to manage the Fund in the intervals between meetings of
the Board, except the powers prohibited by statute from being
delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors
of the Fund, as a group, owned less than 1% of the outstanding
shares of the Fund.
As of November 1, 1994, the following shareholders
beneficially owned more than 5% of the outstanding shares of the
Growth Stock, New Era, New Horizons and Growth & Income Funds,
respectively: Pirateline & Co., FBO Spectrum Growth Fund Acct.,
Attn.: Mark White, State Street Bank & Trust Co., 1776 Heritage
Drive - 4W, North Quincy, Massachusetts 02171-2197; Small Cap
Value and Science & Technology Funds, respectively: Charles
PAGE 62
Schwab & Co. Inc., Reinvest. Account, Attn.: Mutual Fund Dept.,
101 Montgomery Street, San Francisco, California 94104-4122;
Equity Index Fund: Northern Trust Co. Tr., Intermountain
Healthcare, Savings Plan Trust, P.O. Box 92956, Chicago, Illinois
60690-9209; and the OTC Fund, Sigler & Co. CF Smithsonian Int.,
Wellington Trust Co., Chemical Bank, Attn.: Voila Diacumakos, 4
New York Plaza, 4th Floor, New York, New York 10004-2413.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, T. Rowe Price provides the
Fund with discretionary investment services. Specifically, T.
Rowe Price is responsible for supervising and directing the
investments of the Fund in accordance with the Fund's investment
objectives, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. T. Rowe
Price is also responsible for effecting all security transactions
on behalf of the Fund, including the negotiation of commissions
and the allocation of principal business and portfolio brokerage.
In addition to these services, T. Rowe Price provides the Fund
with certain corporate administrative services, including:
maintaining the Fund's corporate existence and corporate records;
registering and qualifying Fund shares under federal and state
laws; monitoring the financial, accounting, and administrative
functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer
agent; assisting the Fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as
officers, directors, and committee members of the Fund without
cost to the Fund.
The Management Agreement also provides that T. Rowe Price,
its directors, officers, employees, and certain other persons
performing specific functions for the Fund will only be liable to
the Fund for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
All Funds, Except Equity Index Fund
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of
two components: a Group Management Fee ("Group Fee") and an
Individual Fund Fee ("Fund Fee"). The Fee is paid monthly to T.
PAGE 63
Rowe Price on the first business day of the next succeeding
calendar month and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the sum of
the daily Group Fee accruals ("Daily Group Fee Accruals") for
each month. The Daily Group Fee Accrual for any particular day
is computed by multiplying the Price Funds' group fee accrual as
determined below ("Daily Price Funds' Group Fee Accrual") by the
ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily
Price Funds' Group Fee Accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
of calendar days in the year by the annualized Daily Price Funds'
Group Fee Accrual for that day as determined in accordance with
the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
For the purpose of calculating the Group Fee, the Price
Funds include all the mutual funds distributed by T. Rowe Price
Investment Services, Inc., (excluding T. Rowe Price Spectrum
Fund, Inc. and any institutional or private label mutual funds).
For the purpose of calculating the Daily Price Funds' Group Fee
Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with the Fund's prospectus as of the
close of business on the previous business day on which the Fund
was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the
daily Fund Fee accruals ("Daily Fund Fee Accruals") for each
month. The Daily Fund Fee Accrual for any particular day is
computed by multiplying the fraction of one (1) over the number
of calendar days in the year by the individual Fund Fee Rate and
PAGE 64
multiplying this product by the net assets of the Fund for that
day, as determined in accordance with the Fund's prospectus as of
the close of business on the previous business day on which the
Fund was open for business. The individual fund fees for each
Fund are listed in the chart below:
Individual Fund Fees
Balanced Fund 0.15%
Blue Chip Growth Fund 0.30%
Capital Appreciation Fund 0.30%
Capital Opportunity Fund 0.45%
Dividend Growth Fund 0.20%
Equity Income Fund 0.25%
Growth & Income Fund 0.15%
Growth Stock Fund 0.25%
Equity Index Fund 0.20%
Mid-Cap Growth Fund 0.35%
New America Growth Fund 0.35%
New Era Fund 0.25%
New Horizons Fund 0.35%
OTC Fund 0.45%
Science & Technology Fund 0.35%
Small-Cap Value Fund 0.35%
Value Fund 0.35%
The following chart sets forth the total management fees, if
any, paid to T. Rowe Price by each Fund, during the last three
years:
Fund 1993 1992 1991
Balanced $ 1,169,038 $ 158,000 **
Blue Chip Growth ** * *
Capital Appreciation 2,740,545 1,539,000 1,119,000
Dividend Growth ** * *
Equity Income 15,154,800 10,430,000 6,829,000
Growth & Income 5,209,477 3,693,000 2,991,000
Growth Stock 11,117,706 11,217,000 9,367,000
Mid-Cap Growth 152,853 ** *
New America Growth 3,988,797 2,385,000 1,166,000
New Era 4,365,990 4,337,000 4,660,000
New Horizons 10,367,727 9,589,000 8,089,000
OTC 1,547,061 1,858,000 2,126,495
Science & Technology 2,841,791 1,479,000 809,000
Small-Cap Value 2,963,580 1,165,000 119,000
PAGE 65
* Prior to commencement of operations.
** Due to each Fund's expense limitation in effect at that time,
no management fees were paid by the Funds to T. Rowe Price.
Limitation on Fund Expenses
The Management Agreement between the Fund and T. Rowe Price
provides that the Fund will bear all expenses of its operations
not specifically assumed by T. Rowe Price. However, in
compliance with certain state regulations, T. Rowe Price will
reimburse the Fund for certain expenses which in any year exceed
the limits prescribed by any state in which the Fund's shares are
qualified for sale. Presently, the most restrictive expense
ratio limitation imposed by any state is 2.5% of the first $30
million of the Fund's average daily net assets, 2% of the next
$70 million of the Fund's assets, and 1.5% of net assets in
excess of $100 million. Reimbursement by the Fund to T. Rowe
Price of any expenses paid or assumed under a state expense
limitation may not be made more than two years after the end of
the fiscal year in which the expenses were paid or assumed.
Balanced, Blue Chip Growth, Capital Appreciation, Capital
Opportunity, Dividend Growth, Equity Index, Mid-Cap Growth, New
America Growth, Science & Technology, Small-Cap Value, Value Fund
The following chart sets forth expense ratio limitations and
the periods for which they are effective. For each, T. Rowe
Price has agreed to bear any Fund expenses which would cause the
Fund's ratio of expenses to average net assets to exceed the
indicated percentage limitations. The expenses borne by T. Rowe
Price are subject to reimbursement by the Fund through the
indicated reimbursement date, provided no reimbursement will be
made if it would result in the Fund's expense ratio exceeding its
applicable limitation.
Expense
Limitation Ratio Reimbursement
Fund Period Limitation Date
Balanced+ January 1, 1993- 1.00% December 31, 1996
December 31, 1994
Blue Chip Growth June 30, 1993- 1.25% December 31, 1996
December 31, 1994
Capital
Appreciation January 1, 1990- 1.25% December 31, 1995
December 31, 1993
PAGE 66
Capital
Opportunity November 29, 1994- 1.35% December 31, 1998
December 31, 1996
Dividend Growth December 30, 1992- 1.00% December 31, 1996
December 31, 1994
Equity Index++ January 1, 1994- 0.45% December 31, 1997
December 31, 1995
Mid-Cap Growth* January 1, 1994- 1.25% December 31, 1997
December 31, 1995
New America
Growth January 1, 1990- 1.25% December 31, 1995
December 31, 1993
Science &
Technology January 1, 1992- 1.25% December 31, 1995
December 31, 1993
Small-Cap
Value January 1, 1992- 1.25% December 31, 1995
December 31, 1993
Value September 29,1994- 1.10% December 31, 1998
December 31, 1996
+ The Balanced Fund previously operated under a 1.00%
limitation that expired December 31, 1992. The reimbursement
period for this limitation extends through December 31, 1994.
++ The Equity Index Fund previously operated under a 0.45%
limitation that expired December 31, 1993. The reimbursement
period for this limitation extends through December 31, 1995.
* The Mid-Cap Growth Fund previously operated under a 1.25%
limitation that expired December 31, 1993. The reimbursement
period for this limitation extends through December 31, 1995.
Each of the above-referenced Fund's Management Agreement also
provides that one or more additional expense limitation periods
(of the same or different time periods) may be implemented after
the expiration of the current expense limitation, and that with
respect to any such additional limitation period, the Fund may
reimburse T. Rowe Price, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional
expense limitation.
Pursuant to the Balanced Fund's current expense limitation,
$280,000 of management fees were not accrued by the Fund for the
year ended December 31, 1993. Pursuant to the previous expense
limitation, $571,000 remains subject to reimbursement through
December 31, 1994.
PAGE 67
Pursuant to the Blue Chip Growth Fund's current expense
limitation, $53,000 of management fees were not accrued by the
Fund for the period ended December 31, 1993, and $30,000 of other
expenses were borne by T. Rowe Price and subject to further
reimbursement.
Pursuant to the Dividend Growth Fund's current expense
limitation, $145,000 of management fees were not accrued by he
Fund for the period ended December 31, 1993, and $84,000 of other
Fund expenses borne by T. Rowe Price and are subject to future
reimbursement.
Pursuant to the Equity Index Fund's current expense
limitation, $293,000 of management fees were not accrued by the
Fund for the year ended December 31, 1993, and $20,000 of other
expenses were borne by T. Rowe Price. Additionally, $338,000 of
unaccrued fees and expenses remain subject to future
reimbursement. Pursuant to a previous expense limitation,
$421,000 of unaccrued fees and expenses from 1990-1991 have been
permanently waived.
Pursuant to Mid-Cap Growth Fund's current expense limitation,
$136,000 of management fees were not accrued by the Fund for the
year ended December 31, 1993. Additionally, $92,000 of unaccrued
fees and expenses from 1992 are subject to future reimbursement.
For New America Growth Fund, during the year ended December
31, 1987, $326,000 of management fees were not accrued by the
Fund pursuant to an annual state limitation. In 1988, the Fund
obtained a variance from this limitation which permitted the 1987
fees to be reimbursed to T. Rowe Price. The unaccrued fees from
1987 were to be reimbursed to T. Rowe Price only to the extent
that doing so would not cause the Fund's ratio of expenses to
average net assets to exceed any expense limitation then in
effect. Pursuant to these provisions, the remaining $278,000 of
fees were reimbursed to T. Rowe Price during the year ended
December 31, 1993.
Pursuant to Science & Technology Fund's previous expense
limitation, $264,000 of unaccrued 1990-1991 fees were repaid
during the year ended December 31, 1993, and $170,000 of 1990-
1991 fees have been permanently waived.
Pursuant to Small-Cap Value Fund's current and previous
expense limitations, $180,000 of unaccrued 1990-1991 fees,
representing the entire unaccrued balance, were reimbursed to the
Manager during the year ended December 31, 1993.
PAGE 68
Capital Appreciation Fund
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of
three components: a Group Management Fee ("Group Fee"), an
Individual Fund Fee ("Fund Fee") and a performance fee adjustment
("Performance Fee Adjustment") based on the performance of the
Fund relative to the Standard & Poor's 500 Stock Index (the
"Index"). The Fee is paid monthly to T. Rowe Price on the first
business day of the next succeeding calendar month and is
calculated as described below. The performance adjustment for
the year ended December 31, 1993, decreased management fees by
$220,000.
The Monthly Group Fee and Monthly Fund Fee are combined (the
"Combined Fee") and are subject to a Performance Fee Adjustment,
depending on the total return investment performance of the Fund
relative to the total return performance of the Standard & Poor's
500 Stock Composite Index (the "Index") during the previous
thirty-six (36) months. The Performance Fee Adjustment is
computed as of the end of each month and if an adjustment
results, is added to, or subtracted from the Combined Fee. No
Performance Fee Adjustment is made to the Combined Fee unless the
investment performance ("Investment Performance") of the Fund
(stated as a percent) exceeds, or is exceeded by, the investment
record ("Investment Record") of the Index (stated as a percent)
by at least one full point. (The difference between the
Investment Performance and Investment Record will be referred to
as the Investment Performance Differential.) The Performance Fee
Adjustment for any month is calculated by multiplying the rate of
the Performance Fee Adjustment ("Performance Fee Adjustment") (as
determined below) achieved for the 36-month period, times the
average daily net assets of the Fund for such 36-month period and
dividing the product by 12. The Performance Fee Adjustment Rate
is calculated by multiplying the Investment Performance
Differential (rounded downward to the nearest full point) times a
factor of .02%. Regardless of the Investment Performance
Differential, the Performance Fee Adjustment Rate shall not
exceed .30%. the same period.
Example
For example, if the Investment Performance Differential
was 11.6, it would be rounded to 11. The Investment
Performance Differential of 11 would be multiplied by
PAGE 69
.02% to arrive at the Performance Fee Adjustment Rate of
.22%. The .22% Performance Fee Adjustment Rate would be
multiplied by the fraction of 1/12 and that product would be
multiplied by the Fund's average daily net assets for the 36-
month period to arrive at the Performance Fee Adjustment.
The computation of the Investment Performance of the Fund and
the Investment Record of the Index will be made in accordance
with Rule 205-1 under the Investment Advisers Act of 1940 or any
other applicable rule as, from time to time, may be adopted or
amended. These terms are currently defined as follows:
The Investment Performance of the Fund is the sum of: (i) the
change in the Fund's net asset value per share during the period;
(ii) the value of the Fund's cash distributions per share having
an exdividend date occurring within the period; and (iii) the per
share amount of any capital gains taxes paid or accrued during
such period by the Fund for undistributed, realized long-term
capital gains.
The Investment Record of the Index is the sum of: (i) the
change in the level of the Index during the period; and (ii) the
value, computed consistently with the Index, of cash
distributions having an exdividend date occurring within the
period made by companies whose securities comprise the Index.
Equity Index Fund
Management Fee
The Fund pays T. Rowe Price an annual investment management
fee in monthly installments of .20% of the average daily net
asset value of the Fund. Due to the effect of the Fund's expense
limitation, for the years ended December 31, 1993, December 31,
1992, and December 31, 1991, the Fund did not pay T. Rowe Price
an investment management fee.
Equity Income, Growth & Income, Growth Stock, New Era, and New
Horizons Funds
T. Rowe Price Spectrum Fund, Inc.
The Fund is a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc.
("Spectrum Fund"), T. Rowe Price, T. Rowe Price Services, Inc.
and various other T. Rowe Price funds which, along with the Fund,
are funds in which Spectrum Fund invests (collectively all such
funds "Underlying Price Funds").
PAGE 70
The Agreement provides that, if the Board of
Directors/Trustees of any Underlying Price Fund determines that
such Underlying Fund's share of the aggregate expenses of
Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the
Underlying Price Fund will bear those expenses in proportion to
the average daily value of its shares owned by Spectrum Fund,
provided further that no Underlying Price Fund will bear such
expenses in excess of the estimated savings to it. Such savings
are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been
invested directly in the Underlying Price Funds and the resulting
reduction in shareholder servicing costs. Although such cost
savings are not certain, the estimated savings to the Underlying
Price Funds generated by the operation of Spectrum Fund are
expected to be sufficient to offset most, if not all, of the
expenses incurred by Spectrum Fund.
All Funds
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as the Fund's
distributor. Investment Services is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. The
offering of the Fund's shares is continuous.
Investment Services is located at the same address as the
Fund and T. Rowe Price -- 100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to the Fund
pursuant to an Underwriting Agreement ("Underwriting Agreement"),
which provides that the Fund will pay all fees and expenses in
connection with: registering and qualifying its shares under the
various state "blue sky" laws; preparing, setting in type,
printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services
will pay all fees and expenses in connection with: printing and
distributing prospectuses and reports for use in offering and
PAGE 71
selling Fund shares; preparing, setting in type, printing, and
mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and
offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in
connection with the sale of its shares in all states in which the
shares are qualified and in which Investment Services is
qualified as a broker-dealer. Under the Underwriting Agreement,
Investment Services accepts orders for Fund shares at net asset
value. No sales charges are paid by investors or the Fund.
All Funds
CUSTODIAN
State Street Bank and Trust Company is the custodian for the
Fund's securities and cash, but it does not participate in the
Fund's investment decisions. Portfolio securities purchased in
the U.S. are maintained in the custody of the Bank and may be
entered into the Federal Reserve Book Entry System, or the
security depository system of the Depository Trust Corporation.
The Fund (other than Equity Index Fund) has entered into a
Custodian Agreement with The Chase Manhattan Bank, N.A., London,
pursuant to which portfolio securities which are purchased
outside the United States are maintained in the custody of
various foreign branches of The Chase Manhattan Bank and such
other custodians, including foreign banks and foreign securities
depositories as are approved by the Fund's Board of
Directors/Trustees in accordance with regulations under the
Investment Company Act of 1940. The Bank's main office is at 225
Franklin Street, Boston, Massachusetts 02110. The address for
The Chase Manhattan Bank, N.A., London is Woolgate House, Coleman
Street, London, EC2P 2HD, England.
CODE OF ETHICS
The Fund's investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
PAGE 72
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; a change has occurred in T. Rowe Price's
rating of the security within five days; or the security is
subject to internal trading restrictions. In addition, employees
are prohibited from engaging in short-term trading (e.g.,
purchases and sales involving the same security within 60 days).
Any material violation of the Code of Ethics is reported to the
Board of the Fund. The Board also reviews the administration of
the Code of Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Fund are made by T. Rowe Price. T.
Rowe Price is also responsible for implementing these decisions,
including the negotiation of commissions and the allocation of
portfolio brokerage and principal business.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it
is T. Rowe Price's policy to obtain quality execution at the most
favorable prices through responsible brokers and dealers and, in
the case of agency transactions, at competitive commission rates.
However, under certain conditions, the Fund may pay higher
brokerage commissions in return for brokerage and research
services. As a general practice, over-the-counter orders are
executed with market-makers. In selecting among market-makers,
T. Rowe Price generally seeks to select those it believes to be
actively and effectively trading the security being purchased or
sold. In selecting broker-dealers to execute the Fund's
portfolio transactions, consideration is given to such factors as
the price of the security, the rate of the commission, the size
and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational
capabilities of competing brokers and dealers, and brokerage and
research services provided by them. It is not the policy of T.
Rowe Price to seek the lowest available commission rate where it
is believed that a broker or dealer charging a higher commission
PAGE 73
rate would offer greater reliability or provide better price or
execution.
Fixed Income Securities
Fixed income securities are generally purchased from the
issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being
paid by the client although the price usually includes an
undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the
bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe
Price may effect principal transactions on behalf of the Fund
with a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances, or otherwise deal
with any such broker or dealer in connection with the acquisition
of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions,
including designations in fixed price offerings.
How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what
levels of commission rates are reasonable in the marketplace for
transactions executed on behalf of the Fund. In evaluating the
reasonableness of commission rates, T. Rowe Price considers: (a)
historical commission rates, both before and since rates have
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.
Description of Research Services Received from Brokers and
Dealers
T. Rowe Price receives a wide range of research services from
brokers and dealers. These services include information on the
PAGE 74
economy, industries, groups of securities, individual companies,
statistical information, accounting and tax law interpretations,
political developments, legal developments affecting portfolio
securities, technical market action, pricing and appraisal
services, credit analysis, risk measurement analysis, performance
analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective.
Research services are received primarily in the form of written
reports, computer generated services, telephone contacts and
personal meetings with security analysts. In addition, such
services may be provided in the form of meetings arranged with
corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services
are generated by third parties but are provided to T. Rowe Price
by or through broker-dealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays
cash for certain research services received from external
sources. T. Rowe Price also allocates brokerage for research
services which are available for cash. While receipt of research
services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could
be materially increased if it attempted to generate such
additional information through its own staff. To the extent that
research services of value are provided by brokers or dealers, T.
Rowe Price may be relieved of expenses which it might otherwise
bear.
T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than brokerage
or research services. In accordance with the provisions of
Section 28(e) of the Securities Exchange Act of 1934, T. Rowe
Price may from time to time receive services and products which
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
PAGE 75
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and
execution services also furnish research services to T. Rowe
Price. With regard to the payment of brokerage commissions, T.
Rowe Price has adopted a brokerage allocation policy embodying
the concepts of Section 28(e) of the Securities Exchange Act of
1934, which permits an investment adviser to cause an account to
pay commission rates in excess of those another broker or dealer
would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is
reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of
either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over
which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which
commission rates or net prices charged by broker-dealers reflect
the value of their research services, T. Rowe Price would expect
to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular
broker. T. Rowe Price may receive research, as defined in
Section 28(e), in connection with selling concessions and
designations in fixed price offerings in which the Funds
participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for
that portion of its discretionary client brokerage business where
special needs do not exist, or where the business may be
allocated among several brokers or dealers which are able to meet
the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers or dealers,
and attempts to allocate a portion of its brokerage business in
response to these assessments. Research analysts, counselors,
various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive
from brokers or dealers and make judgments as to the level of
PAGE 76
business which would recognize such services. In addition,
brokers or dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and
research services they provide. Actual brokerage received by any
firm may be less than the suggested allocations but can, and
often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above.
In no case is a broker or dealer excluded from receiving business
from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which represent
a substantial majority of all assets under management. Research
services furnished by brokers or dealers through which T. Rowe
Price effects securities transactions may be used in servicing
all accounts (including non-Fund accounts) managed by T. Rowe
Price. Conversely, research services received from brokers or
dealers which execute transactions for the Fund are not
necessarily used by T. Rowe Price exclusively in connection with
the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Fund. T. Rowe
Price may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is T. Rowe Price's policy not to favor
one client over another in making recommendations or in placing
orders. T. Rowe Price frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
PAGE 77
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
To the extent possible, T. Rowe Price intends to recapture
solicitation fees paid in connection with tender offers through
T. Rowe Price Investment Services, Inc., the Fund's distributor.
At the present time, T. Rowe Price does not recapture commissions
or underwriting discounts or selling group concessions in
connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate
elimination of all or a portion of the selling-group concession
or underwriting discount when purchasing tax-exempt municipal
securities on behalf of its clients in underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between
the Fund and T. Rowe Price, T. Rowe Price is responsible not only
for making decisions with respect to the purchase and sale of the
Fund's portfolio securities, but also for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that T. Rowe Price may place orders for the Fund's
portfolio transactions with broker-dealers through the same
trading desk T. Rowe Price uses for portfolio transactions in
domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities
are located. These brokers and dealers may include certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming
Holdings") and Jardine Fleming Group Limited ("JFG"), persons
indirectly related to T. Rowe Price. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary,
owns 25% of the common stock of Rowe Price-Fleming International,
Inc. ("RPFI"), an investment adviser registered under the
Investment Advisers Act of 1940. Fifty percent of the common
stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is
50% owned by Robert Fleming Holdings and 50% owned by Jardine
Matheson Holdings Limited. Orders for the Fund's portfolio
transactions placed with affiliates of Robert Fleming Holdings
PAGE 78
and JFG will result in commissions being received by such
affiliates.
The Board of Directors/Trustees of the Fund has authorized T.
Rowe Price to utilize certain affiliates of Robert Fleming and
JFG in the capacity of broker in connection with the execution of
the Fund's portfolio transactions. These affiliates include, but
are not limited to, Jardine Fleming Securities Limited ("JFS"), a
wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and
Robert Fleming, Inc. (a New York brokerage firm). Other
affiliates of Robert Fleming Holding and JFG also may be used.
Although it does not believe that the Fund's use of these brokers
would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors/Trustees of the Fund has agreed
that the procedures set forth in Rule 17e-1 under that Act will
be followed when using such brokers.
Other
For the years 1993, 1992, and 1991, the total brokerage
commissions paid by each Fund, including the discounts received
by securities dealers in connection with underwritings, and the
percentage of these commissions paid to firms which provided
research, statistical, or other services to T. Rowe Price in
connection with the management of each Fund, or, in some cases,
to each Fund, was as shown below.
1993 1992 1991
Fund Commissions % Commissions % Commissions %
Balanced $ 91,678 46.1%$ 162,000 46% $ 122,000 65%
Blue Chip
Growth 177,317 10% * * * *
Capital
Apprec-
iation 1,141,732 45.28% 439,000 55% 478,000 59%
Dividend
Growth 282,409 22% * * * *
Equity
Income 4,660,406 42.12% 3,419,000 37% 3,087,000 36%
Growth &
Income 2,814,544 26.9% 2,218,000 24% 2,051,000 31%
Growth
Stock 3,983,572 40.4% 3,392,000 41% 1,753,000 65%
PAGE 79
Equity
Index 20,978 8.6% 39,000 2.8% 10,000 *
Mid-Cap
Growth 441,166 18.9% 119,000 39% * *
New America
Growth 2,345,540 17.6% 1,349,00 20% 1,435,000 24%
New Era 1,758,270 28.03% 299,000 95% 451,000 63%
New
Horizons 7,336,582 8.2% 4,810,000 13% 4,239,000 14%
OTC 776,333 6.68% 120,000 35.83% 51,000 None
Science &
Tech-
nology 2,186,853 23.97% 861,000 19% 909,000 16%
Small-Cap
Value 995,993 11.4% 661,000 26.2% 117,00012.8%
* Prior to commencement of operations.
On December 31, 1993, the Balanced Fund held 38,200 shares of
the common stock of J.P. Morgan with a value of $2,650,000. In
1993, J.P. Morgan was among the Fund's regular brokers or dealers
as defined in Rule 10b-1 under the Investment Company Act of
1940.
On December 31, 1993, the Capital Appreciation Fund held
commercial paper of the following regular brokers or dealers of
the Fund Bear Stearns, BT Securities, Goldman Sachs Group,
Merrill Lynch, and Morgan Stanley Group, respectively, with a
value of $5,000,000, $5,834,000, $5,000,000, $5,000,000, and
$5,012,000, respectively. In 1993, Bear Stearns, BT Securities,
Goldman Sachs Group, Merrill Lynch, and Morgan Stanley Group were
among the Fund's regular brokers or dealers as defined in Rule
10b-1 under the Investment Company Act of 1940.
On December 31, 1993, the Equity Income Fund held 250,000
shares of the common stock of J.P. Morgan with a value of
$17,344,000. In 1993, J.P. Morgan was among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the Investment
Company Act of 1940.
On December 31, 1993, the Growth Stock Fund held 150,000
shares of the common stock of J.P. Morgan with a value of
$10,406,000. In 1993, J.P. Morgan was among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the Investment
Company Act of 1940.
PAGE 80
On December 31, 1993, the New Era Fund held commercial paper
of the following regular brokers or dealers of the Fund BT
Securities, Citicorp, Goldman Sachs Group, Merrill Lynch, and
Morgan Stanley Group, respectively, with a value of $639,000,
$4,997,000, $5,000,000, $5,000,000, and $5,000,000, respectively.
In 1993, Bear Stearns, BT Securities, Goldman Sachs Group,
Merrill Lynch, and Morgan Stanley Group were among the Fund's
regular brokers or dealers as defined in Rule 10b-1 under the
Investment Company Act of 1940.
On December 31, 1993, the Science & Technology Fund held
commercial paper of the following regular brokers or dealers of
the Fund Bankers Trust Company with a value of $5,598,000. In
1993, Bankers Trust Company was among the Fund's regular brokers
or dealers as defined in Rule 10b-1 under the Investment Company
Act of 1940.
The portfolio turnover rate for each Fund for the years ended
1993, 1992, and 1991, was as follows:
Fund 1993 1992 1991
Balanced 8.7% 207.7% 239.9%
Blue Chip Growth 89.0% * *
Capital Appreciation 39.4% 30.3% 50.7%
Dividend Growth 51.2% * *
Equity Income 31.2% 30.0% 33.5%
Growth & Income 22.4% 29.9% 47.9%
Growth Stock 35.3% 27.4% 31.8%
Equity Index 0.8% 0.1% 5.8%
Mid-Cap Growth 62.4% 51.9% *
New America Growth 43.7% 26.4% 42.3%
New Era 24.7% 16.9% 9.0%
New Horizons 49.4% 49.6% 32.5%
OTC 40.8% 30.7% 31.2%
Science & Technology 163.4% 144.3% 148.2%
Small-Cap Value 11.8% 12.1% 30.5%
* Prior to commencement of operations.
All Funds
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities
exchange (including NASDAQ for all Funds except Growth Stock, New
Horizons, New Era, Growth & Income and OTC) are valued at the
PAGE 81
last quoted sales price on the day the valuations are made. For
the Growth Stock, New Horizons, New Era and Growth & Income
Funds, securities regularly traded in the over-the-counter market
are valued at the latest bid price. For the OTC Fund, such
securities are valued at the mean of the latest bid and asked
prices. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to
be the primary market for such security. Other equity securities
and those (for all Funds other than OTC) listed securities that
are not traded on a particular day are valued at a price within
the limits of the latest bid and asked prices deemed by the Board
of Directors/Trustees, or by persons delegated by the Board, best
to reflect fair value. For the OTC Fund, listed securities not
traded on a particular day are valued at the mean of the latest
bid and asked prices.
Debt securities are generally traded in the over-the-counter
market and are valued at a price deemed best to reflect fair
value as quoted by dealers who make markets in these securities
or by an independent pricing service. Short-term debt securities
are valued at their cost in local currency which, when combined
with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per
share, all assets and liabilities initially expressed in foreign
currencies are converted into U.S. dollars at the mean of the bid
and offer prices of such currencies against U.S. dollars quoted
by a major bank.
Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value are stated at fair value as determined in good faith by or
under the supervision of the officers of the Fund, as authorized
by the Board of Directors/Trustees.
All Funds
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is
equal to the Fund's net asset value per share or share price.
The Fund determines its net asset value per share by subtracting
the Fund's liabilities (including accrued expenses and dividends
payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
PAGE 82
share of the Fund is normally calculated as of the close of
trading on the New York Stock Exchange ("NYSE") every day the
NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale
redemption and repurchase of shares) for the Fund may be
suspended at times (a) during which the NYSE is closed, other
than customary weekend and holiday closings, (b) during which
trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net
assets, or (d) during which a governmental body having
jurisdiction over the Fund may by order permit such a suspension
for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange
Commission (or any succeeding governmental authority) shall
govern as to whether the conditions prescribed in (b), (c), or
(d) exist.
DIVIDENDS AND DISTRIBUTIONS
Unless you elect otherwise, the Fund's annual dividend and
capital gain distribution, if any, and final quarterly dividend
(Balanced, Dividend Growth, Equity Income, Equity Index, Growth &
Income and Value Funds) will be reinvested on the reinvestment
date using the NAV per share of that date. The reinvestment date
normally precedes the payment date by about 10 days although the
exact timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").
A portion of the dividends paid by the Fund may be eligible
for the dividends-received deduction for corporate shareholders.
For tax purposes, it does not make any difference whether
dividends and capital gain distributions are paid in cash or in
additional shares. The Fund must declare dividends equal to at
least 98% of ordinary income (as of December 31) and capital
PAGE 83
gains (as of October 31) in order to avoid a federal excise tax
and distribute 100% of ordinary income and capital gains as of
December 31 to avoid federal income tax.
At the time of your purchase, the Fund's net asset value may
reflect undistributed capital gains or net unrealized
appreciation of securities held by the Fund. A subsequent
distribution to you of such amounts, although constituting a
return of your investment, would be taxable. For federal income
tax purposes, the Fund is permitted to carry forward its net
realized capital losses, if any, for eight years and realize net
capital gains up to the amount of such losses without being
required to pay taxes on, or distribute such gains. On March 31,
1994, the books of each Fund indicated that each Fund's aggregate
net assets included undistributed net income, net realized
capital gains or losses, and unrealized appreciation or
depreciation which are listed below.
Net Realized
Undistributed Capital Gain Unrealized
Fund Net Income (Losses) Appreciation
Balanced $ 168,831 $ 2,802,039 $ 17,856,325
Blue Chip Growth 51,458 311,602 75,095
Capital Appreciation 4,307,655 9,614,383 34,679,989
Dividend Growth 10,975 968,483 3,500,445
Equity Income 132,075 36,563,108 153,387,691
Growth & Income 565,481 22,384,390 111,591,142
Growth Stock 5,622,452 77,136,174 504,675,454
Equity Index (20,432) (59,655) 0,653,704
Mid-Cap Growth (6,712) 287,896 6,617,753
New America Growth (687,076) 10,628,216 133,099,050
New Era 4,107,074 3,625,090 180,184,982
New Horizons (2,305,793) 27,512,703 447,645,857
OTC 33,240 8,428,739 39,383,793
Science & Technology (1,119,465) (906,871) 60,918,139
Small-Cap Value 1,625,923 10,031,400 78,296,913
If, in any taxable year, the Fund should not qualify as a
regulated investment company under the Code: (i) the Fund would
be taxed at normal corporate rates on the entire amount of its
taxable income, if any, without deduction for dividends or other
distributions to shareholders; and (ii) the Fund's distributions
to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been
considered capital gain dividends).
PAGE 84
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be
subject to U.S. tax. For shareholders who are not engaged in a
business in the U.S., this tax would be imposed at the rate of
30% upon the gross amount of the dividends in the absence of a
Tax Treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains realized
by the Fund are not subject to tax unless the foreign shareholder
is a nonresident alien individual who was physically present in
the U.S. during the tax year for more than 182 days.
All Funds Except Equity Index Fund
To the extent the Fund invests in foreign securities, the
following would apply:
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies. Capital gains on the sale of such holdings will be
deemed to be ordinary income regardless of how long the Fund
holds its investment. In addition to bearing their proportionate
share of the funds expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses
of such funds. In addition, the Fund may be subject to corporate
income tax and an interest charge on certain dividends and
capital gains earned from these investments, regardless of
whether such income and gains were distributed to shareholders.
In accordance with tax regulations, the Fund intends to
treat these securities as sold on the last day of the Fund's
fiscal year and recognize any gains for tax purposes at that
time; losses will not be recognized. Such gains will be
considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received
cash to pay such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations, are taxable as ordinary
income. If the net effect of these transactions is a gain, the
dividend paid by the Fund will be increased; if the result is a
PAGE 85
loss, the income dividend paid by the Fund will be decreased.
Adjustments to reflect these gains and losses will be made at the
end of the Fund's taxable year.
Balanced Fund
YIELD INFORMATION
From time to time, the Fund may advertise a yield figure
calculated in the following manner:
An income factor is calculated for each security in the
portfolio, which in the case of bonds is based upon the
security's market value at the beginning of the period and yield-
to-maturity as determined in conformity with regulations of the
Securities and Exchange Commission, and in the case of stocks is
based upon the stated dividend rate. The income factors are then
totalled for all securities in the portfolio. Next, expenses of
the Fund for the period net of expected reimbursements are
deducted from the income to arrive at net income, which is then
converted to a per-share amount by dividing net income by the
average number of shares outstanding during the period. The net
income per share is divided by the net asset value on the last
day of the period to produce a monthly yield which is then
annualized. Quoted yield factors are for comparison purposes
only, and are not intended to indicate future performance or
forecast the dividend per share of the Fund.
All Funds
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes
the reinvestment of all capital gain distributions and income
dividends for the period or periods indicated, without regard to
tax consequences to a shareholder in the Fund. Total return is
calculated as the percentage change between the beginning value
of a static account in the Fund and the ending value of that
account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not
be considered indicative of the future performance of the Fund.
Each average annual compound rate of return is derived from the
cumulative performance of the Fund over the time period
specified. The annual compound rate of return for the Fund over
any other period of time will vary from the average.
PAGE 86
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/93 12/31/93 12/31/93 12/31/93
S&P 500 10.07% 97.34% 301.77%
Dow Jones
Industrial Avg. 16.99 105.25 333.86
CPI 2.75 21.00 43.93
Equity Index Fund 9.42 52.02%
(3/30/90)
Lehman Brothers Aggregate Index 50.18
Salomon Brothers Broad Investment
Grade Index 50.76
Dividend Growth Fund 19.41 19.41
(12/30/92)
Blue Chip Growth Fund 14.32
(6/30/93)
Growth Stock Fund 15.56 96.73 251.42 10,472.21
(4/11/50)
New America Growth Fund 17.44 153.87 269.31
(9/30/85)
Lipper Growth
Fund Index 14.19 102.77 248.11 219.09
Equity Income Fund 14.84 74.08 220.77
(10/31/85)
Lipper Equity Income
Fund Average 13.38 78.00 160.86
Growth & Income Fund 12.96 81.64 186.93 292.39
(12/21/82)
Lipper Growth and Income
Fund Index 14.86 87.67 252.07 334.61
Capital Appreciation Fund 15.66 84.41 156.43
(6/30/86)
Lipper Capital Appreciation
Funds Average 15.16 107.86 120.81
PAGE 87
New Era Fund 15.33 53.18 194.60 1,040.50
(1/20/69)
Lipper Natural Resources
Funds Average 22.94 55.30 119.33 N/A
Science & Technology Fund 24.25 228.01 199.48
(9/30/87)
Lipper Science and
Technology Index 23.55 130.75 88.59
Russell 2000 18.90 92.39 181.47 70.46
Balanced Fund 13.35% 92.62% 253.40% 20,369.52%
(12/31/39)
Lipper Balanced
Fund Index 11.70 82.55 219.63 N/A
Lehman Brothers
Aggregate Index 9.75 70.64 206.56 N/A
Salomon Brothers Broad
Investment Grade Index 9.92 71.22 207.91 N/A
New Horizons Fund 22.01 134.34 178.05 3,587.41
(6/3/60)
OTC Fund 18.40 77.10 172.23% 14,347.80
(6/1/56)
Small-Cap Value Fund 23.30 109.51 101.51
(6/30/88)
Russell 2000 18.90 92.39 181.47 89.31
S&P 400 Mid-Cap 13.96 146.18 364.69 149.54
NASDAQ Composite 14.75 103.68 178.82 N/A
Lipper Small Company
Growth Funds Average 16.93 121.43 228.73 N/A
Mid-Cap Growth Fund 26.24 57.21
(6/30/92)
Russell 2000 18.90 92.39 181.47 40.56
S&P 400 Mid-Cap Index 13.96 146.18 364.69 32.29
NASDAQ 14.75 37.83
Lipper Growth
Fund Index 14.19 26.77
Lipper Growth Fund
Category Average 10.61 24.43
PAGE 88
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/93 12/31/93 12/31/93 12/31/93
S&P 500 10.07% 14.56% 14.92%
Dow Jones
Industrial Avg. 16.99 15.47 15.81
CPI 2.75 3.89 3.71
Equity Index Fund 9.42 11.81%
(3/30/90)
Lehman Brothers Aggregate Index 11.44
Salomon Brothers Broad Investment
Grade Index 11.56
Dividend Growth Fund 19.41 19.41
(12/30/92)
Blue Chip Growth Fund 14.32
(6/30/93)
Growth Stock Fund 15.56 14.49 13.39 11.25
(4/11/50)
New America Growth Fund 17.44 20.48 17.16
(9/30/85)
Lipper Growth
Fund Index 14.19 15.19 13.28 N/A
Equity Income Fund 14.84 11.72 15.34
(10/31/85)
Lipper Equity Income
Fund Average 13.38 12.14 12.17
Growth & Income Fund 12.96 12.68 11.12 13.20
(12/21/82)
Lipper Growth and Income
Fund Index 14.86 13.42 13.41 14.29
Capital Appreciation Fund 15.66 13.02 13.37
(6/30/86)
Lipper Capital Appreciation
Funds Average 15.16 15.24 10.59
New Era Fund 15.33 8.90 11.41 10.25
(1/20/69)
Lipper Natural Resources
Funds Average 22.94 8.98 7.72 N/A
PAGE 89
Science & Technology Fund 24.25 26.82 19.18
(9/30/87)
Lipper Science and
Technology Index 23.55 18.20 10.68
Russell 2000 13.98 10.90 8.91
Balanced Fund 13.35 14.01 13.45 10.36
(12/31/39)
Lipper Balanced
Fund Index 11.70 12.79 12.32 N/A
Lehman Brothers
Aggregate Index 9.75 11.28 11.85 N/A
Salomon Brothers Broad
Investment Grade Index 9.92 11.36 11.90 N/A
New Horizons Fund 22.01 18.57 10.77 11.34
(6/3/60)
OTC Fund 18.40 12.11 10.53 14.15
(6/1/56)
Small-Cap Value Fund 23.30 15.94 13.58
(6/30/88)
Russell 2000 13.98 10.90 12.30
S&P 400 Mid-Cap 19.74 16.60 18.08
NASDAQ Composite 14.75 15.29 10.80 N/A
Lipper Small Company
Growth Funds Average 16.93 16.76 12.16 N/A
Mid-Cap Growth Fund 26.24 35.06
(6/30/92)
Russell 2000 13.98 10.90 25.38
S&P 400 Mid-Cap Index 19.74 16.60 20.43
NASDAQ 14.75 23.78
Lipper Growth
Fund Index 14.19 17.13
Lipper Growth Fund
Category Average 10.61 15.57
PAGE 90
Outside Sources of Information
From time to time, in reports and promotions literature: (1)
the Fund's total return performance or P/E ratio may be compared
to any one or combination of the following: (i) the Standard &
Poor's 500 Stock Index so that you may compare the Fund's results
with those of a group of unmanaged securities widely regarded by
investors as representative of the stock market in general; (ii)
other groups of mutual funds, including T. Rowe Price Funds,
tracked by: (A) Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets; (B) Morningstar,
Inc., another widely used independent research firm which ranks
mutual funds; or (C) other financial or business publications,
such as Business Week, Money Magazine, Forbes and Barron's, which
provide similar information; (iii) indices of stocks comparable
to those in which the Fund invests; (2) the Consumer Price Index
(measure for inflation) may be used to assess the real rate of
return from an investment in the Fund; (3) other government
statistics such as GNP, and net import and export figures derived
from governmental publications, e.g., The Survey of Current
Business, may be used to illustrate investment attributes of the
Fund or the general economic, business, investment, or financial
environment in which the Fund operates; (4) various financial,
economic and market statistics developed by brokers, dealers and
other persons may be used to illustrate aspects of the Fund's
performance; (5) the effect of tax-deferred compounding on the
Fund's investment returns, or on returns in general, may be
illustrated by graphs, charts, etc. where such graphs or charts
would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred
basis (assuming reinvestment of capital gains and dividends and
assuming one or more tax rates) with the return on a taxable
basis; and (6) the sectors or industries in which the Fund
invests may be compared to relevant indices or surveys (e.g., S&P
Industry Surveys) in order to evaluate the Fund's historical
performance or current or potential value with respect to the
particular industry or sector. The Balanced Fund may also
compare its performance or yield to a variety of fixed income
investments (e.g., repos, CDs, Treasury bills) and other measures
of performance set forth in financial publications maintained by
persons such as the Donoghue Organization, Merrill Lynch, Pierce
Fenner & Smith, Inc., Salomon Brothers, Inc. etc. In connection
with (5) above, information derived from the following chart may
be used:
PAGE 91
In addition to the above, from time to time, in reports and
promotional literature, one or more of the T. Rowe Price funds,
including this Fund, may compare its performance to Overnight
Government Repurchase Agreements, Treasury bills, notes, and
bonds, certificates of deposit, and six-month money market
certificates. Performance may also be compared to (1) indices of
broad groups of managed or unmanaged securities considered to be
representative of or similar to Fund portfolio holdings; (2)
other mutual funds; or (3) other measures of performance set
forth in publications such as:
Advertising News Service, Inc., "Bank Rate Monitor+ - The
Weekly Financial Rate Reporter" is a weekly publication which
lists the yields on various money market instruments offered to
the public by 100 leading banks and thrift institutions in the
U.S., including loan rates offered by these banks. Bank
certificates of deposit differ from mutual funds in several
ways: the interest rate established by the sponsoring bank is
fixed for the term of a CD; there are penalties for early
withdrawal from CDs; and the principal on a CD is insured.
Donoghue Organization, Inc., "Donoghue's Money Fund Report" is
a weekly publication which tracks net assets, yield, maturity
and portfolio holdings on approximately 380 money market mutual
funds offered in the U.S. These funds are broken down into
various categories such as U.S. Treasury, Domestic Prime and
Euros, Domestic Prime and Euros and Yankees, and Aggressive.
First Boston High Yield Index. It shows statistics on the
Composite Index and analytical data on new issues in the
marketplace and low-grade issuers.
Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund
Performance Analysis" is a monthly publication which tracks net
assets, total return, principal return and yield on
approximately 950 fixed income mutual funds offered in the
United States.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices" is a monthly publication which lists principal, coupon
and total return on over 100 different taxable bond indices
tracked by Merrill Lynch, together with the par weighted
characteristics of each Index. The index used as a benchmark
for the High Yield Fund is the High Yield Index. The two
indices used as benchmarks for the Short-Term Bond Fund are the
91-Day Treasury Bill Index and the 1-2.99 Year Treasury Note
Index.
PAGE 92
Morningstar, Inc., is a widely used independent research firm
which rates mutual funds by overall performance, investment
objectives and assets.
Salomon Brothers Inc., "Analytical Record of Yields and Yield
Spreads" is a publication which tracks historical yields and
yield spreads on short-term market rates, public obligations of
the U.S. Treasury and agencies of the U.S. government, public
corporate debt obligations, municipal debt obligations and
preferred stocks.
Salomon Brothers Inc., "Bond Market Round-up" is a weekly
publication which tracks the yields and yield spreads on a
large, but select, group of money market instruments, public
corporate debt obligations, and public obligations of the U.S.
Treasury and agencies of the U.S. Government.
Salomon Brothers Inc., "High Yield Composite Index" is an index
which provides performance and statistics for the high yield
market place.
Salomon Brothers Inc., "Market Performance" is a monthly
publication which tracks principal return, total return and
yield on the Salomon Brothers Broad investment - Grade Bond
Index and the components of the Index.
Shearson Lehman Brothers, Inc., "The Bond Market Report" is a
monthly publication which tracks principal, coupon and total
return on the Shearson Lehman Govt./Corp. Index and Shearson
Lehman Aggregate Bond Index, as well as all the components of
these Indices.
Telerate Systems, Inc., is a market data distribution network
which tracks a broad range of financial markets including, the
daily rates on money market instruments, public corporate debt
obligations and public obligations of the U.S. Treasury and
agencies of the U.S. Government.
Wall Street Journal, is a national daily financial news
publication which lists the yields and current market values on
money market instruments, public corporate debt obligations,
public obligations of the U.S. Treasury and agencies of the
U.S. government as well as common stocks, preferred stocks,
convertible preferred stocks, options and commodities; in
addition to indices prepared by the research departments of
such financial organizations as Shearson Lehman/American
PAGE 93
Express Inc., and Merrill Lynch, Pierce, Fenner and Smith,
Inc., including information provided by the Federal Reserve
Board.
Performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, etc. will also be used.
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution
and 28% tax bracket.
Year Taxable Tax Deferred
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs
An IRA is a long-term investment whose objective is to
accumulate personal savings for retirement. Due to the long-term
nature of the investment, even slight differences in performance
will result in significantly different assets at retirement.
Mutual funds, with their diversity of choice, can be used for IRA
investments. Generally, individuals may need to adjust their
underlying IRA investments as their time to retirement and
tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds
and may help investors achieve various long-term investment
goals, such as investing money for retirement, saving for a down
payment on a home, or paying college costs. To explain how the
Fund could be used to assist investors in planning for these
goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc.
and/or T. Rowe Price Investment Services, Inc. may be made
available. These currently include: the Asset Mix Worksheet
which is designed to show shareholders how to reduce their
investment risk by developing a diversified investment plan; the
College Planning Guide which discusses various aspects of
PAGE 94
financial planning to meet college expenses and assists parents
in projecting the costs of a college education for their
children; the Retirement Planning Kit (also available in a PC
version) includes a detailed workbook to determine how much money
you may need for retirement and suggests how you might invest to
achieve your objectives; and the Retirees Financial Guide which
includes a detailed workbook to determine how much money you can
afford to spend and still preserve your purchasing power and
suggests how you might invest to reach your goal and the Personal
Strategy Planner simplifies investment decision making by helping
investors define personal financial goals, established length of
time the investor intends to invest, determine risk "comfort
zone" and select a diversified investment mix. From time to
time, other worksheets and guides may be made available as well.
Of course, an investment in the Fund cannot guarantee that such
goals will be met.
To assist investors in understanding the different returns
and risk characteristics of various investments, the
aforementioned guides will include presentation of historical
returns of various investments using published indices. An
example of this is shown below.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/93
50 years 20 years 10 years 5 years
Small-Company Stocks 15.3% 18.8% 10.0% 13.3%
Large-Company Stocks 12.3 12.8 14.9 14.5
Foreign Stocks N/A 14.4 17.9 2.3
Long-Term Corporate Bonds 5.6 10.2 14.0 13.0
Intermediate-Term U.S.
Gov't. Bonds 5.7 9.8 11.4 11.3
Treasury Bills 4.6 7.5 6.4 5.6
U.S. Inflation 4.3 5.9 3.7 3.9
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
PAGE 95
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how
these historical indices would have performed in various
combinations over a specified time period in terms of return. An
example of this is shown below.
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/93 $10,000
Investment
After Period
_____________ ________________ ____________
Nominal Real Best Worst
PortfolioGrowth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.3% 5.4% 24.9%-9.3% $ 79,775
II. Moderate
Risk 60% 30% 10% 12.1% 6.2% 29.1%-15.6%$ 90,248
III. High
Risk 80% 20% 0% 12.9% 7.0% 33.4%-21.9%$100,031
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-93 and Lehman Brothers Government/Corporate Bond
Index from 1974-75), and 30-day Treasury bills from January
1974 through December 1993. Past performance does not
guarantee future results. Figures include changes in
principal value and reinvested dividends and assume the same
asset mix is maintained each year. This exhibit is for
illustrative purposes only and is not representative of the
performance of any T. Rowe Price fund.
PAGE 96
** Based on inflation rate of 5.9% for the 20-year period ended
12/31/93.
Insights
From time to time, Insights, a T. Rowe Price publication of
reports on specific investment topics and strategies, may be
included in the Fund's fulfillment kit. Such reports may include
information concerning: calculating taxable gains and losses on
mutual fund transactions, coping with stock market volatility,
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
Dividend Growth Fund
Growing income from rising dividends
Chart 1
A line graph titled "Growing income from rising dividends" which
depicts hypothetical income and yield on a original investment of
$10,000 in a stock currently yielding 3% and whose dividends grow
8% a year. The chart shows a range of yields from 0% to 15% and
income from $0 to $1,500, for five year periods from zero to 20.
The yield and income for each of the periods are approximately as
listed below.
PAGE 97
5 Years 10 Years 15 Years 20 Years
Yield 4% 6% 9% 14%
Income $400 $600 $900 $1,400
Chart depicts hypothetical income and yield on an original
investment of $10,000 in a stock currently yielding 3% and whose
dividends grow 8% a year.
Example is for illustrative purposes only and is not indicative
of an investment in the T. Rowe Price Dividend Growth Fund.
New Horizons, OTC and Small-Cap Value Funds
PERFORMANCE OF LARGE VS. SMALL COMPANY
STOCKS FOLLOWING RECESSIONS
(Total Return For 12 Months After Recession)
Chart 2
Bar graph appears here comparing large and small company
stocks during eight post-recession periods.
Large Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
________________________________________________________________
36% 38% 13% 11% 28% 14% 26% 11%
_________________________________________________________________
Small Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
_________________________________________________________________
51% 53% 18% 12% 58% 45% 44% 28%
_________________________________________________________________
Source: T. Rowe Price Associates, Inc.
PAGE 98
Data supplied by Ibbotson Associates
The average price-earnings (p/e) ratio of the T. Rowe Price
New Horizons Fund is a valuation measure widely used by the
investment community with respect to small company stocks, and,
in the opinion of T. Rowe Price, has been a good indicator of
future small-cap stock performance. The following chart is
intended to show the history of the average (unweighted) p/e
ratio of the New Horizons Fund's portfolio companies compared
with the p/e ratio of the Standard & Poor's 500 Index. Of
course, the portfolio of the OTC and Small-Cap Value Funds will
differ from the portfolio of the New Horizons Fund. Earnings per
share are estimated by T. Rowe Price for each quarter end.
T. ROWE PRICE NEW HORIZONS FUND, INC.
P/E Ratio of Fund's Portfolio Securities
Relative To The S & P "500" P/E Ratio
(12 Months Forward) January 31, 1993
Chart 3
This is a one line chart that shows the p/e ratio of the New
Horizons Fund relative to the p/e ratio of the S&P 500 Stock
Index. The ratio between the two p/e's is depicted quarterly
from 3/61 to 12/31/93.
The horizontal axis is divided into two year periods. The
vertical axis indicates the relative p/e ratio with 0.5, 1,
1.5, 2 and 2.5 indicated by horizontal lines. The ratio at
3/61 is approximately 2, is at the lowest point in the
first quarter of 1977 at approximately 0.95, is at the
highest point near the end of 1983 at approximately 2.2,
and is at 1.4 on December 31, 1993.
Source: T. Rowe Price Associates, Inc.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, many mutual funds charge
sales fees to investors or use fund assets to finance
distribution activities. These fees are in addition to the
normal advisory fees and expenses charged by all mutual funds.
There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or
"load") can be charged at the time the fund is purchased
(front-end load) or at the time of redemption (back-end load).
Front-end loads are charged on the total amount invested.
PAGE 99
Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1
plans allow for the payment of marketing and sales expenses from
fund assets. These expenses are usually computed daily as a
fixed percentage of assets.
The Fund is a no-load fund which imposes no sales charges
or 12b-1 fees. No-load funds are generally sold directly to the
public without the use of commissioned sales representatives.
This means that 100% of your purchase is invested for you.
The examples in the attached table show the impact on
investment performance of the most common types of sales charges.
For each example the investor has $10,000 to invest and each fund
performs at a compound annual rate of 6% per year (net of fund
expenses, including management fees) for ten years. The "Total
After 10 Years" shows the amount the investor would receive from
the fund after ten years. Net charges are the total sales fee(s)
paid by the investor or charged to the fund's assets. Figures
for total return are net of Fund expenses including management
fees.
The table is for illustrative purposes and is not intended
to reflect the anticipated performance of the Fund.
If a $10,000 investment produced a 6% annual total return for
ten years in a mutual fund that has . . .
A Sales 1 1.00%
Charge 12b-1
No A of 2% A Plan
Sales Redemp- With a Sales Distri-
Charge tion Fee 1% Redemp- Charge bution
"No-Load" of 1% tion Fee of 8.5% Fee
_________ ________ __________ _______ _______
Original
Investment $10,000 $10,000 $10,000 $10,000 $10,000
(Sales Charge) N/C 2 N/C (200) (850) N/C
_______ _______ _______ _______ _______
Amount Credited
to Account $10,000 $10,000 $ 9,800 $ 9,150 $10,000
Compounded at 6%
For Ten Years $17,908 $17,908 $17,550 $16,386 $16,196
Less Redemption Fee N/C (179) (176) N/C N/C
_______ _______ _______ _______ _______
PAGE 100
Total After
10 Years $17,908 $17,729 $17,374 $16,386 $16,196
Net Charges $0 ($179) ($376) ($850)($1,332)
1 Figures have been rounded
2 N/C - No charge
3 Net of 12b-1 plan distribution charges
Redemptions in Kind
In the unlikely event a shareholder were to receive an in
kind redemption of portfolio securities of the Fund, brokerage
fees could be incurred by the shareholder in a subsequent sale of
such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for
securities or assets other than cash will be limited to (1) bona
fide reorganizations; (2) statutory mergers; or (3) other
acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the Fund; (b) are acquired
for investment and not for resale except in accordance with
applicable law; (c) have a value that is readily ascertainable
via listing on or trading in a recognized United States or
international exchange or market; and (d) are not illiquid.
Balanced Fund
On August 31, 1992, the T. Rowe Price Balanced Fund acquired
substantially all of the assets of the Axe-Houghton Fund B, a
series of Axe-Houghton Funds, Inc. As a result of this
acquisition, the Securities & Exchange Commission requires that
the historical performance information of the Balanced Fund be
based on the performance of Fund B. Therefore, all performance
information of the Balanced Fund prior to September 1, 1992,
reflects the performance of Fund B and investment managers other
than T. Rowe Price. Performance information after August 31,
1992, reflects the combined assets of the Balanced Fund and Fund
B.
PAGE 101
All Funds, Except Capital Appreciation, Equity Income and New
America Growth Funds
CAPITAL STOCK
The Fund's Charter authorizes the Board of Directors to
classify and reclassify any and all shares which are then
unissued, including unissued shares of capital stock into any
number of classes or series, each class or series consisting of
such number of shares and having such designations, such powers,
preferences, rights, qualifications, limitations, and
restrictions, as shall be determined by the Board subject to the
Investment Company Act and other applicable law. The shares of
any such additional classes or series might therefore differ from
the shares of the present class and series of capital stock and
from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to
applicable law, and might thus be superior or inferior to the
capital stock or to other classes or series in various
characteristics. The Board of Directors may increase or decrease
the aggregate number of shares of stock or the number of shares
of stock of any class or series that the Fund has authorized to
issue without shareholder approval.
Except to the extent that the Fund's Board of Directors
might provide by resolution that holders of shares of a
particular class are entitled to vote as a class on specified
matters presented for a vote of the holders of all shares
entitled to vote on such matters, there would be no right of
class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no
provision entitling the holders of the present class of capital
stock to a vote as a class on any matter. Accordingly, the
preferences, rights, and other characteristics attaching to any
class of shares, including the present class of capital stock,
might be altered or eliminated, or the class might be combined
with another class or classes, by action approved by the vote of
the holders of a majority of all the shares of all classes
entitled to be voted on the proposal, without any additional
right to vote as a class by the holders of the capital stock or
of another affected class or classes.
Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
vote in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote
PAGE 102
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Fund, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Fund, a special meeting of shareholders of
the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of
all the votes of the Fund entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Fund the
reasonably estimated costs of preparing and mailing the notice of
the meeting. The Fund, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Fund to the extent required by
Section 16(c) of the Investment Company Act of 1940.
Capital Appreciation, Equity Income and New America Growth Funds
ORGANIZATION OF THE FUND
For tax and business reasons, the Funds' were organized as
Massachusetts Business Trusts (1985 for the Equity Income and New
America Growth Funds and 1986 for the Capital Appreciation Fund),
and are registered with the Securities and Exchange Commission
under the Investment Company Act of 1940 as diversified, open-end
investment companies, commonly known as "mutual funds."
The Declaration of Trust permits the Board of Trustees to
issue an unlimited number of full and fractional shares of a
single class. The Declaration of Trust also provides that the
Board of Trustees may issue additional series or classes of
shares. Each share represents an equal proportionate beneficial
interest in the Fund. In the event of the liquidation of the
Fund, each share is entitled to a pro rata share of the net
assets of the Fund.
Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
vote in the election of or removal of trustees (to the extent
hereinafter provided) and on other matters submitted to the vote
PAGE 103
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing trustees unless and
until such time as less than a majority of the trustees holding
office have been elected by shareholders, at which time the
trustees then in office will call a shareholders' meeting for the
election of trustees. Pursuant to Section 16(c) of the
Investment Company Act of 1940, holders of record of not less
than two-thirds of the outstanding shares of the Fund may remove
a trustee by a vote cast in person or by proxy at a meeting
called for that purpose. Except as set forth above, the trustees
shall continue to hold office and may appoint successor trustees.
Voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in the election of trustees can, if
they choose to do so, elect all the trustees of the Trust, in
which event the holders of the remaining shares will be unable to
elect any person as a trustee. No amendments may be made to the
Declaration of Trust without the affirmative vote of a majority
of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights; the right of
redemption and the privilege of exchange are described in the
prospectus. Shares are fully paid and nonassessable, except as
set forth below. The Trust may be terminated (i) upon the sale
of its assets to another diversified, open-end management
investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, or (ii) upon
liquidation and distribution of the assets of the Trust, if
approved by the vote of the holders of a majority of the
outstanding shares of the Trust. If not so terminated, the Trust
will continue indefinitely.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Fund. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Fund and
requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by
the Fund or a Trustee. The Declaration of Trust provides for
indemnification from Fund property for all losses and expenses of
any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder's incurring financial loss
on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations,
a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the Fund, the shareholders
of the Fund paying such liability will be entitled to
reimbursement from the general assets of the Fund. The Trustees
PAGE 104
intend to conduct the operations of the Fund in such a way so as
to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such Fund.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the
Securities Act of 1933, and the Fund or its shares are registered
under the laws of all states which require registration, as well
as the District of Columbia and Puerto Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, L.L.P., whose address
is 919 Third Avenue, New York, New York 10022, is legal counsel
to the Fund.
INDEPENDENT ACCOUNTANTS
Blue Chip Growth, Dividend Growth, Equity Income, Growth &
Income, Mid-Cap Growth, New America Growth, and New Era Funds
Price Waterhouse, L.L.P. 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to the
Fund.
Balanced, Capital Appreciation, Capital Opportunity, Growth
Stock, Equity Index Fund, New Horizons, OTC, Science &
Technology, and Small-Cap Value, and Value Funds
Coopers & Lybrand, L.L.P. 217 East Redwood Street,
Baltimore, Maryland 21202, are independent accountants to the
Fund.
All Funds, except Blue Chip Growth, Dividend Growth, Value, and
Capital Opportunity Funds
The financial statements of the Fund for the year ended
December 31, 1993, and the report of independent accountants are
included in the Fund's Annual Report for the year ended December
31, 1993. Also included are the unaudited financial statements
of the Funds dated June 30, 1994. A copy of the Annual and Semi-
Annual Reports accompany this Statement of Additional
Information. The following financial statements and the report
PAGE 105
of independent accountants appearing in the Annual Report for the
year ended December 31, 1993, and the unaudited financial
statements for the Fund's Semi-Annual Report dated June 30, 1994,
are incorporated into this Statement of Additional Information by
reference:
ANNUAL REPORT REFERENCES:
CAPITAL EQUITY EQUITY GROWTH &
APPRECIATION INCOME INDEX INCOME
____________ ________ ______ ________
Report of Independent
Accountants 16 15 15 15
Statement of Net Assets,
December 31, 1993 7-10 5-9 6-11 6-9
Statement of Operations,
year ended
December 31, 1993 11 10 11 10
Statement of Changes in
Net Assets, years ended
December 31, 1993 and
December 31, 1992 12 11 12 11
Notes to Financial
Statements,
December 31, 1993 13-14 12-13 12-14 12-13
Financial Highlights 15 14 14 14
PAGE 106
NEW
GROWTH AMERICA NEW
STOCK GROWTH ERA OTC
__________ ____________ _______ ______
Report of Independent
Accountants 15 13 14 11
Statement of Net Assets,
December 31, 1993 6-10 7-8 7-8 4-6
Statement of Operations,
year ended
December 31, 1993 10 9 9 7
Statement of Changes in
Net Assets, years ended
December 31, 1993 and
December 31, 1992 11 10 10 8
Notes to Financial
Statements,
December 31, 1993 11-13 10-11 11-12 8-9
Financial Highlights 14 12 13 10
SCIENCE
NEW & SMALL-CAP
HORIZONS TECHNOLOGY VALUE
________ _________ _______
Report of Independent
Accountants 18 14 15
Portfolio of Investments,
December 31, 1993 8-11 7-8 5-8
Statement of Assets and
Liabilities,
December 31, 1993 12 8 9
Statement of Operations, year
ended December 31, 1993 13 9 10
Statement of Changes in Net
Assets, years ended December
31, 1993 and December
31, 1992 14 10 11
Notes to Financial Statements,
December 31, 1993 15-16 11-12 12-13
Financial Highlights 17 13 14
PAGE 107
BALANCED
____________
Report of Independent Accountants 18
Statement of Net Assets, December 31, 1993 6-12
Statement of Operations, December 31, 1993 13
Statement of Changes in Net Assets,
year ended December 31, 1993, two-months
ended December 31, 1992 and year ended
October 31, 1992 14
Notes to Financial Statements, December 31, 1993 15-16
Financial Highlights 17
MID-CAP
GROWTH
___________
Report of Independent Accountants 11
Statement of Net Assets, December 31, 1993 5-7
Statement of Operations, December 31, 1993 7
Statement of Changes in Net Assets,
year ended December 31, 1993 and
June 30, 1992 (Commencement of Operations)
to December 31, 1992 8
Notes to Financial Statements, December 31, 1993 8-10
Financial Highlights, year ended December 31, 1993
and June 30, 1992 (Commencement of Operations)
to December 31, 1992 10
PAGE 108
SEMI-ANNUAL REPORT REFERENCES:
CAPITAL EQUITY EQUITY GROWTH &
APPRECIATION INCOME INDEX INCOME
_____________ __________ _______ ________
Statement of Net Assets,
June 30, 1994 5-8 4-8 5-10 4-7
Statement of Operations,
six months ended June
30, 1993 (unaudited) 9 9 11 8
Statement of Changes in Net
Assets, six months ended
June 30, 1994 and year
ended December 31,
1993 (unaudited) 10 10 12 9
Notes to Financial Statements,
June 30, 1994
(unaudited) 11-12 11-12 13-14 10-11
Financial Highlights
(unaudited) 13 13 15 12
NEW
GROWTH AMERICA NEW
STOCK GROWTH ERA OTC
__________ _____________________ ________
Statement of Net Assets,
June 30, 1994 (unaudited)4-7 5-6 5-6 4-6
Statement of Operations, six
months ended June 30, 1994
(unaudited) 9 7 7 7
Statement of Changes in Net
Assets, six months ended
June 30, 1994 and year ended
December 31, 1993 (unaudited)10 8 8 8
Notes to Financial Statements,
June 30, 1994 (unaudited)11-12 8-9 8-9 8-9
Financial Highlights
(unaudited) 13 10 10 10
PAGE 109
SCIENCE
NEW & SMALL-CAP
HORIZONS TECHNOLOGY VALUE
________ _________ _______
Portfolio of Investments,
June 30, 1994 (unaudited) 6-10 6-7 3-6
Statement of Assets and
Liabilities, June 30, 1994
(unaudited) 11 7 7
Statement of Operations, six
months ended June 30,
1994 (unaudited) 12 8 8
Statement of Changes in Net
Assets, six months ended
June 30, 1994, year ended
December 31, 1993 (unaudited) 13 9 9
Notes to Financial Statements,
June 30, 1994 (unaudited) 13-15 9-10 9-10
Financial Highlights
(unaudited) 15 11 11
BALANCED
____________
Statement of Net Assets, June 30, 1994 (unaudited) 4-11
Statement of Operations, six months ended
June 30, 1994 (unaudited) 12
Statement of Changes in Net Assets,
six months ended June 30, 1994 and year ended
December 31, 1993 (unaudited) 13
Notes to Financial Statements, June 30,
1994 (unaudited) 14-15
Financial Highlights (unaudited) 16
PAGE 110
MID-CAP
GROWTH
___________
Statement of Net Assets, June 30, 1994 (unaudited) 5-7
Statement of Operations, six months ended
June 30, 1994 (unaudited) 7
Statement of Changes in Net Assets,
six months ended June 30, 1994
and year ended December 31, 1993
(unaudited) 8
Notes to Financial Statements, June 30, 1994
(unaudited) 9-10
Financial Highlights (unaudited) 11
Blue Chip Growth and Dividend Growth Funds
The financial statements of the Fund for the period ended
December 31, 1993, and the report of independent accountants are
included in the Fund's Annual Report for the period ended
December 31, 1993. Also included are the unaudited financial
statements of the Fund's dated June 30, 1994. A copy of the
Annual and Semi-Annual Reports accompanies this Statement of
Additional Information. The following financial statements and
the report of independent accountants appearing in the Annual
Report for the period ended December 31, 1993, and the unaudited
financial statements for the Fund's Semi-Annual Report dated June
30, 1994, are incorporated into this Statement of Additional
Information by reference:
ANNUAL REPORT:
BLUE CHIP
GROWTH
___________
Report of Independent Accountants 11
Statement of Net Assets, December 31, 1993 5-7
Statement of Operations, June 30, 1993
(Commencement of Operations) to December 31, 1993 7
Statement of Changes in Net Assets, June 30,
1993 (Commencement of Operations) to December 31, 1993 8
Notes to Financial Statements, December 31, 1993 8-9
Financial Highlights, June 30, 1993 (Commencement
of Operations) to December 31, 1993 10
PAGE 111
DIVIDEND
GROWTH
____________
Report of Independent Accountants 11
Statement of Net Assets, December 31, 1993 4-6
Statement of Operations, December 30, 1992
(Commencement of Operations) to December 31, 1993 7
Statement of Changes in Net Assets, December 30,
1992 (Commencement of Operations) to
December 31, 1993 8
Notes to Financial Statements, December 31, 1993 8-10
Financial Highlights, December 30, 1992 (Commencement
of Operations) to December 31, 1993 10
SEMI-ANNUAL REPORT:
BLUE CHIP
GROWTH
___________
Statement of Net Assets, June 30, 1994 (unaudited) 4-6
Statement of Operations, six months ended
June 30, 1994 (unaudited) 7
Statement of Changes in Net Assets, six months ended
June 30, 1994 and year ended December 31, 1993
(unaudited) 8
Notes to Financial Statements, June 30, 1994 (unaudited)9-10
Financial Highlights (unaudited) 11
DIVIDEND
GROWTH
____________
Statement of Net Assets, June 30, 1994 (unaudited) 4-6
Statement of Operations, six months ended
June 30, 1994 (unaudited) 7
Statement of Changes in Net Assets,six months ended
June 30, 1994 and year ended
December 31, 1993 (unaudited) 8
Notes to Financial Statements,
June 30, 1994 (unaudited) 9-10
Financial Highlights (unaudited) 11
PAGE 112
RATINGS OF CORPORATE DEBT SECURITIES
Moody's Investors Services, Inc. (Moody's)
Aaa-Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge."
Aa-Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A-Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Baa-Bonds rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements:
their futures cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.
B-Bonds rated B generally lack the characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with
respect to principal or interest.
Ca-Bonds rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked short-comings.
C-Lowest-rated; extremely poor prospects of ever attaining
investment standing.
PAGE 113
Standard & Poor's Corporation (S&P)
AAA-This is the highest rating assigned by Standard & Poor's to
a debt obligation and indicates an extremely strong capacity to
pay principal and interest.
AA-Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong.
A-Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity
to pay principal and interest. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, C, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. BB
indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
D-In default.
Fitch Investors Service, Inc.
AAA-High grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions, and liable to but slight
market fluctuation other than through changes in the money rate.
The prime feature of a "AAA" bond is the showing of earnings
several times or many times interest requirements for such
stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features
may enter, such as a wide margin of protection through
collateral, security or direct lien on specific property.
Sinking funds or voluntary reduction of debt by call or purchase
or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
PAGE 114
AA-Of safety virtually beyond question and readily salable.
Their merits are not greatly unlike those of "AAA" class but a
bond so rated may be junior though of strong lien, or the margin
of safety is less strikingly broad. The issue may be the
obligation of a small company, strongly secured, but influenced
as to rating by the lesser financial power of the enterprise and
more local type of market.
PAGE 115
T. ROWE PRICE VALUE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 26, 1994
Assets
Receivable for Fund shares sold $100,000
Deferred organizational expenses 51,613
________
Total assets 151,613
Liabilities
Amount due Manager 47,686
Accrued expenses 3,927
________
Total liabilities 51,613
________
Net Assets - offering and redemption
price of $10.00 per share; 1,000,000,000
shares of $0.0001 par value capital
stock authorized, 10,000 shares
outstanding $100,000
_________
_________
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
T. Rowe Price Value Fund, Inc. (the "Corporation") was
organized on September 21, 1994, as a Maryland corporation and is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The
Corporation has had no operations other than those matters
related to organization and registration as an investment
company, the registration of shares for sale under the Securities
Act of 1933, and the sale of 10,000 shares of the T. Rowe Price
Value Fund at $10.00 per share on September 26, 1994 to T. Rowe
Price Associates, Inc. The Fund's receivable for fund shares
sold was funded by T. Rowe Price Associates, Inc. on September
27, 1994. The Fund has entered into an investment management
agreement with T. Rowe Price Associates, Inc. (the Manager) which
is described in the Statement of Additional Information under the
heading "Investment Management Services."
PAGE 116
Organizational expenses of $51,613 for the fund have been
accrued at September 26, 1994, and will be amortized on a
straight-line basis over a period not to exceed sixty months.
The Manager has agreed to advance certain organizational expenses
incurred by the Fund and will be reimbursed for such expenses
approximately six months after the commencement of the Fund's
operations.
The Manager has agreed that in the event any of its initial
shares are redeemed during the 60-month amortization period of
the deferred organizational expenses, proceeds from a redemption
of the shares representing the initial capital will be reduced by
a pro rata portion of any unamortized organizational expenses.
PAGE 117
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
T. Rowe Price Value Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities of the T. Rowe Price Value Fund, Inc. (the "Fund")as
of September 26, 1994. This financial statement is the
responsibility of the Funds' management. Our responsibility is
to express an opinion of this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities
referred to above presents fairly, in all material respects, the
financial position of the T. Rowe Price Value Fund, Inc. as of
September 26, 1994, in conformity with generally accepted
accounting principles.
/s/Coopers & Lybrand
COOPERS & LYBRAND
Baltimore, Maryland
September 27, 1994
PAGE 118
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 22, 1994
Assets
Receivable for Fund shares sold $100,000
Deferred organizational expenses 49,056
________
Total assets 149,056
Liabilities
Amount due Manager 47,556
Accrued expenses 1,500
________
Total liabilities 49,056
________
Net Assets - offering and redemption
price of $10.00 per share; 1,000,000,000
shares of $0.0001 par value capital
stock authorized, 10,000 shares
outstanding $100,000
_________
_________
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
T. Rowe Price Capital Opportunity Fund, Inc. (the
"Corporation") was organized on October 7, 1994, as a Maryland
corporation and is registered under the Investment Company Act of
1940 as a non-diversified, open-end management investment
company. The Corporation has had no operations other than those
matters related to organization and registration as an investment
company, the registration of shares for sale under the Securities
Act of 1933, and the sale of 10,000 shares of the T. Rowe Price
Capital Opportunity Fund at $10.00 per share on November 22, 1994
to T. Rowe Price Associates, Inc. The Fund's receivable for fund
shares sold was funded by T. Rowe Price Associates, Inc. on
November 23, 1994. The Fund has entered into an investment
management agreement with T. Rowe Price Associates, Inc. (the
Manager) which is described in the Statement of Additional
Information under the heading "Investment Management Services."
PAGE 119
Organizational expenses of $49,056 for the fund have been
accrued at November 22, 1994, and will be amortized on a
straight-line basis over a period not to exceed sixty months.
The Manager has agreed to advance certain organizational expenses
incurred by the Fund and will be reimbursed for such expenses
approximately six months after the commencement of the Fund's
operations.
The Manager has agreed that in the event any of its initial
shares are redeemed during the 60-month amortization period of
the deferred organizational expenses, proceeds from a redemption
of the shares representing the initial capital will be reduced by
a pro rata portion of any unamortized organizational expenses.
PAGE 120
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
T. Rowe Price Capital Opportunity Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities of the T. Rowe Price Capital Opportunity Fund, Inc.
(the "Fund") as of November 22, 1994. This financial statement
is the responsibility of the Fund's management. Our
responsibility is to express an opinion of this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities
referred to above presents fairly, in all material respects, the
financial position of the T. Rowe Price Capital Opportunity Fund,
Inc. as of November 22, 1994, in conformity with generally
accepted accounting principles.
/s/Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND, L.L.P.
Baltimore, Maryland
November 23, 1994
PAGE 121
APPENDIX A
Chart 1
A line graph titled "Growing income from rising dividends" which
depicts hypothetical income and yield on a original investment of
$10,000 in a stock currently yielding 3% and whose dividends grow
8% a year. The chart shows a range of yields from 0% to 15% and
income from $0 to $1,500, for five year periods from zero to 20.
The yield and income for each of the periods are approximately as
listed below.
5 Years 10 Years 15 Years 20 Years
Yield 4% 6% 9% 14%
Income $400 $600 $900 $1,400
Chart depicts hypothetical income and yield on an original
investment of $10,000 in a stock currently yielding 3% and whose
dividends grow 8% a year. Example is for illustrative purposes
only and is not indicative of an investment in the T. Rowe Price
Dividend Growth Fund.
Chart 2
Bar graph appears here comparing large and small company
stocks during eight post-recession periods.
Large Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
_________________________________________________________________
36% 38% 13% 11% 28% 14% 26% 11%
_________________________________________________________________
PAGE 122
Small Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
_________________________________________________________________
51% 53% 18% 12% 58% 45% 44% 28%
_________________________________________________________________
Source: T. Rowe Price Associates, Inc.
Data supplied by Ibbotson Associates
The average price-earnings (p/e) ratio of the T. Rowe Price
New Horizons Fund is a valuation measure widely used by the
investment community with respect to small company stocks, and,
in the opinion of T. Rowe Price, has been a good indicator of
future small-cap stock performance. The following chart is
intended to show the history of the average (unweighted) p/e
ratio of the New Horizons Fund's portfolio companies compared
with the p/e ratio of the Standard & Poor's 500 Index. Of
course, the portfolio of the OTC and Small-Cap Value Funds will
differ from the portfolio of the New Horizons Fund. Earnings per
share are estimated by T. Rowe Price for each quarter end.
Chart 3
This is a one line chart that shows the p/e ratio of the New
Horizons Fund relative to the p/e ratio of the S&P 500 Stock
Index. The ratio between the two p/e's is depicted quarterly
from 3/61 to 12/31/93.
The horizontal axis is divided into two year periods. The
vertical axis indicates the relative p/e ratio with 0.5, 1,
1.5, 2 and 2.5 indicated by horizontal lines. The ratio at
3/61 is approximately 2, is at the lowest point in the
first quarter of 1977 at approximately 0.95, is at the
highest point near the end of 1983 at approximately 2.2,
and is at 1.4 on December 31, 1993.
Source: T. Rowe Price Associates, Inc.
